Municipal ownership: four lectures delivered at Harvard university, 1907;

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MUNICIPAL OWNERSHIP

FIRST EDITION, . . October 1907.
SECOND IMPRESSION . February 1908.

MUNICIPAL
OWNERSHIP

FOUR LECTURES DELIVERED AT

HARVARD UNIVERSITY

1907

BY LEONARD DARWIN

•»•

AUTHOR OF "MUNICIPAL TRADE"

LONDON

JOHN MURRAY, ALBEMARLE STREET, W.
1908

CONTENTS

LECTURE I

OWNERSHIP NOT THE MAIN QUESTION

PAGE

THE words municipal ownership do not suggest
the real points at issue. When should labour
be directly employed by municipalities is the
vital question I

THE REGULATION OF PRIVATE INDUSTRY

Municipal monopolies must be controlled for
the sake both of the consumer and of the tax-
payer. The unearned increment of value can
be captured by the issue of short-period fran-
chises to private corporations. With well-
considered franchises, private industry can be
efficiently controlled ; though the exact con-
ditions to be imposed are not easily deter-
mined. The grant of franchises on too hard
terms has damaged the electrical industry in
England. The terms of franchises must be
sufficiently liberal. Further reform of the laws
affecting municipal monopolies in private hands

ix

CONTENTS

PAGE

is much needed in the United States and in
England. This enquiry concerning private
industry is a necessary preliminary to a study
of municipal ownership ; because, in cases
where municipal ownership would now be an
improvement on private industry, it would not
necessarily be so if private industry were better
controlled 8

MUNICIPAL OWNERSHIP AND LOCAL TAXATION

The financial questions connected with muni-
cipal ownership will first be considered. In
studying the English statistics of municipal
ownership, we are in effect studying the
financial effects of direct employment. Gain
and loss, which are defined, are of far more
importance than profit and deficit. It cannot
be directly proved that English cities, where
there is much municipal ownership, are either
more or less heavily taxed than those where
there is but little 24

LECTURE II

MUNICIPAL STATISTICS

THE gain may be estimated by deducting the
income foregone from the profits. Neither
individual cities nor industries should be con-
sidered. English statistics indicate the prob-
ability of a small net deficit on new municipal
ventures. The probable loss is more than the
probable deficit for various reasons : including

CONTENTS xi

PAGE

the inadequate charge made for depreciation,
and the possibility of obtaining rents from
private corporations. The loss is probably
more than the charge for the sinking fund ;
and, if so, English cities are losing by their
municipal policy 33

PRICE AND QUALITY

It cannot be proved that goods are made
more or less cheaply by municipal industries,
because of the difficulties connected with such
comparisons connected with prices. In com-
paring the relative qualities of goods, difficulties
of the same kind are also met with. Statistical
results are thus not refuted, but rendered more
doubtful 48

A PRIORI ARGUMENTS

The inherent probability of profit - making
should be considered. The reward of capital
is much the same in municipal as in private
industry. This is frequently denied ; because
the difference in the conditions is not ap-
preciated. A slight gain from the greater
credit of cities is possible. But the manage-
ment is likely to be less economical for various
reasons. The net result to cities is, therefore,
probably a loss 52

FINANCIAL CONCLUSIONS

These a priori conclusions are not refuted
by statistics. English statistics are, however,

xii CONTENTS

PAGE

only relevant if the English methods are being
followed. A priori arguments are alone to be
relied on in judging of the effect of more
advanced policies. Certainly no great gain is
made by municipal ownership in England ;
and general financial considerations tell dis-
tinctly against the direct employment of labour
in all circumstances 64

LECTURE III

MUNICIPAL CORRUPTION

WILL municipal ownership tend to purify civic
life? English civic purity has not increased
concurrently with municipal ownership, but is
of older growth. Municipal industry is bene-
ficial by adding to the importance of local
administration. But it deters busy men from
serving on councils, and it tends to demoralise
the electorate. Corruption with reference to
private franchises would cease with the aban-
donment of private industry. But the risk
of corruption cannot be avoided as regards
any part of the expenditure incurred under
municipal ownership ; and municipalisation
makes the disease less easy to cure. Muni-
cipal employees are not likely to be dis-
franchised 67

WAGES IN MUNICIPAL INDUSTRIES

The pay of municipal workmen is better
than that of private workmen. The direct
employment of labour affords no reason for

CONTENTS xiii

PAGE

this superior treatment ; and the extra taxation
thus thrown on private workmen cannot be
justified. All industry, municipal and private,
should be subject to regulations. The higher
pay of municipal workmen, on the whole,
affords an argument against direct employ-
ment 83

THE CASE FOR DIRECT EMPLOYMENT

The fact that municipalities can regulate
prices best if they manage works themselves,
tells in favour of municipal water supply.
Private proprietors must strive to make pro-
fits ; and this fact justifies the municipal
operation of certain services, but not the con-
struction of the works. The question at issue
is whether industries owned by municipalities
should also be directly managed by the civic
authorities. The foregoing arguments on the
whole tell against direct employment in the
case of ordinary industries. But other
questions relevant to municipal ownership
generally remain to be considered, which may
strengthen the case against direct employment. 91

LECTURE IV

MUNICIPAL OWNERSHIP

THE merits of municipal ownership without
reference to direct employment now, therefore,
remain to be discussed. No risk is thrown on

xiv CONTENTS

PAGE

citizens when franchises are granted, and the
interest of the public can be safeguarded in
terminable franchises quite as well as in leases.
The following are the main objections to
municipal ownership : — The national dividend
will be diminished. Municipal indebtedness
will be increased. Municipal management will
be lacking in initiative ; and it will increase
the tendency for industries to become mono-
polies. On the other hand, socialists hold
that modern industrial methods are wasteful
and cruel. Where the balance of argument
tells against municipal ownership, there the case
against direct employment is strengthened . 104

GENERAL CONCLUSIONS

No formula can be laid down indicating the
limits of municipal ownership. General con-
clusions only can be stated, and each case of
municipalisation must be judged on its own
merits .... 122

SOCIALISTIC IDEALS AND MUNICIPAL OWNERSHIP

To what extent is municipal ownership a
realisation of the ideals of socialists? It
cannot be laid down, as a general rule, that
either the richer or the poorer classes will
be thus benefited. Part of the burdens and
benefits are shifted on to the landowners, and
municipal ownership is certainly, at best, a
clumsy method of redistributing wealth. Cities

CONTENTS xv

PAGE

with debts should pay them off rather than
invest in municipal enterprises. Direct em-
ployment makes employment generally some-
what less regular. At present we should study
existing municipal industries before adding
largely to their number ... 125

LECTURE I

OWNERSHIP NOT THE MAIN
QUESTION

HAD this course of lectures been delivered in
England, " Municipal Trade" would probably
have been selected as the descriptive title ;
because these words would best have brought
to the minds of Englishmen the range of the
subjects to be dealt with. Municipal trade is,
however, an ill-selected phrase ; for it focuses
the mind too exclusively on questions connected
with profit and loss. When I had the honour
to receive an invitation to deliver a course of
lectures in the United States, in order to indicate
their scope, I decided to entitle them " Municipal
Ownership." But, even though a title may not
be misunderstood, it may do harm by giving an
initial bias to the mind ; and it is, therefore,
worth considering briefly whether " Municipal

A

2 LEGAL OWNERSHIP

Ownership " is a more happily selected phrase
than its English equivalent " Municipal Trade."

What we wish to ascertain is whether the
word " ownership" gives a true indication of
the main aims of the advocates of municipal
ownership. In ordinary conversation this word
is somewhat loosely used. In speaking of the
owner of a farm, we often mean the individual
who leases the farm to a farmer, and who, during
the currency of the lease, has no power to deal
with the land, his action being confined to the
extraction of a rent. On the other hand, when
we speak of the owner of a shop or a manu-
factory, we more often mean the person who
conducts the business, and consequently makes
the profits or sustains the losses. Ownership
having, therefore, different meanings, it is pos-
sible that the advocates of municipal owner-
ship may have very different ideals in their
minds.

Although questions connected with the techni-
cal legal ownership of the land on which are
built the municipal industries we are about to
consider are no doubt important, yet I am
convinced that this controversy in England
does not, and will not, in truth, rage round
this question of legal ownership. In order to
illustrate this point, a brief allusion must be

NOT THE MAIN POINT 3

made to the way in which in England water-
works, gas-works, electric lighting works,
and street railways are owned and managed,
these being the industries most commonly
municipalised. But first let me say, in a
parenthesis, that if all my examples are chosen
from Europe, it is not because I fail to see
that much is to be learned on these subjects
on this Continent. It is simply because it
would be folly, if not worse, for an English-
man to come to preach to Americans about
America.

In all the industries just mentioned there is
seldom any direct effective competition ; and
for this reason they have been described as
municipal monopolies. We are all familiar
with the fact that each urban district is as a
rule supplied by only one gas-works. Now,
as regards English legislation, these municipal
monopolies may, broadly speaking, be divided
into two classes, which may perhaps be
described as the older and the newer muni-
cipal monopolies. Water-works and gas-works
belong to the former class, being subject to
laws framed many years ago. The newer
monopolies include electric lighting works and
street railways, the Acts of Parliament by
which they are controlled having been passed

4 LEGAL OWNERSHIP

somewhat more recently. These later Acts,
therefore, serve to indicate, in comparison with
the more old-fashioned legislation, the drift of
modern ideas ; and it will therefore be best
for this reason to confine our attention for the
present almost entirely to these newer municipal
monopolies.

Taking street railways as an example for
discussion, we find that they may be managed
in three distinct ways in England. In the
first place, they may be owned and worked by
municipalities, the employees being directly
paid by the civic authorities. This is analogous
to the case of an owner, who farms his own
land.

Again, English cities, whilst retaining the
legal ownership of the street railways, may
lease them out for terms of years to private
corporations1 for management, a rent being
received which would usually be included
in the ordinary municipal revenues. Here the
municipality plays the part of the landowner who

1 Where there is a difference in the words used in
America and in England, the American example has
been followed. For "corporation," "street railway," and
" franchise," the English reader should read " company,"
"tramway," and "concession." "Industry" and "local
taxation " have also been used where " trade " and " rates "
would be the more usual equivalents in England.

METHODS OF MANAGEMENT 5

lets out his land to a farmer, and only benefits
from his possessions by receiving a rent.

In both the foregoing methods of manage-
ment, the municipality is the technical legal
owner of the industry. Lastly, street railways
may be both owned and managed by private
corporations, in which case they have, as a
rule, been constructed under the Tramways'
Act of 1870. In accordance with the provisions
of this Act, corporations can obtain franchises
which enable them to build and manage street
railways, the municipalities concerned, however,
retaining the right both to purchase the works
at the end of a period of twenty-one years,
and in the meantime to draw from the corpora-
tion an annual payment or rent. When the
franchise period of twenty-one years has elapsed,
a municipality may either undertake the manage-
ment of the street railway itself, in which case
it ceases to belong to the class of street rail-
ways now under consideration ; or it may
permit the same private corporation to con-
tinue to manage the business under similar
conditions to those obtaining during the first
term of the franchise. In this case the
municipality adheres strictly to its original
functions — namely, those of an administrative
body.

6 LEGAL OWNERSHIP

Thus street railways in England may be either
owned and managed by municipalities ; or owned
by municipalities and leased out to private
corporations for working ; or, lastly, owned and
managed by private corporations under conditions
imposed by the State. But it is the comparison
between these two last methods of operation to
which attention is now called : that is, to the
contrast between railways owned by munici-
palities and leased to private corporations, and
railways owned and managed by private corpora-
tions. In both cases the municipality is for the
moment doing nothing whatever with regard to
the street railway but extracting a rent from its
managers ; and in both cases there are definite
stated periods at which the municipality may
either take possession of the railway or make
fresh terms with the managing private corpora-
tion as to rent and fares. There are no doubt
important differences between these two methods
of operation. But in these, the most important
respects, there is a close similarity between them ;
although in the one case the municipality is, and
in the other case it is not, the technical legal
owner. One is a case of municipal ownership
and the other is not. Yet the choice between
these two methods arouses but a very feeble
interest in England, and it appears, therefore,

QUESTIONS PROPOSED 7

that technical legal ownership is not the funda-
mental point at issue.

The contrast which does excite interest is that
between industries in which the employees are
paid by the municipalities and those in which
they are not so paid ; and from this it follows
that the direct employment of labour is, in
truth, the pivot about which this question
turns.

The expression "municipal ownership" is
now so well understood that its use cannot be
avoided. But we must not be led by its use to
divert our enquiry from its proper course. The
foregoing considerations lead me to believe that
the following two questions will indicate the
points to which our attention should be mainly
directed, and will bring us straight to the heart
of this controversy. At all events, the following
are the questions which are now proposed for
your consideration :

1. What is the best method of controlling

those municipal monopolies in which
the employees are paid by private
proprietors ?

2. What are the urban services in which it

is on the whole best that the work
should be performed by employees
directly paid by the civic authorities ?

PRIVATE INDUSTRY

This is nearly equivalent to asking in
what cases should we abolish the con-
tractor, that word being used in its
widest sense.

THE REGULATION OF PRIVATE
INDUSTRY

Although at first sight this first question may
appear to have no connection with municipal
ownership, yet good reasons can be adduced for
dealing with it in connection with this enquiry.
One of the main functions of education should be
to make us take broad views of every subject ;
and certainly few sources of error are more
common amongst uneducated persons than those
which arise from regarding only one side of a
question. Here, in the United States, you are
asking yourselves whether it would be a beneficial
reform to municipalise a considerable number of
industries. But it is surely not enough merely
to consider whether municipal ownership would
be an improvement on private industry as it now
exists. Enquiry should be made concerning all
possible methods of reform in order to decide
which would produce the best results. If the

METHODS OF CONTROL 9

discussion is not conducted in this spirit, the
result may be a proposal to start reforms in a
wholly wrong direction. Municipal ownership
might be better than private industry as the law
now stands, whilst private industry under wiser
regulations might be better than municipal
ownership. Reforms in both these industrial
methods must therefore be considered.

The subject now to be discussed is therefore
the best method of controlling private industry.
A great deal might be said on this question ; but
my remarks will be brief in order to enable me
to revert to other questions more directly con-
nected with municipal ownership. In fact, my
only object will be to show that much remains
to be done in the direction of improving the laws
affecting the control of municipal monopolies in
private hands.

In order to shorten this enquiry, reforms
desirable only in the case of monopolies in
private hands will alone be considered. Many
reforms may perhaps be desirable with regard
to all industry, whether in private hands or
whether conducted by civic authorities ; but
these reforms may now be dismissed, because,
being applicable both to municipal and private
industry, they would not affect the comparison
between the two. Again, although it is true

B

io PRIVATE INDUSTRY

that municipal ownership in England is not
always confined to monopolies, yet no legis-
lative safeguards are required to protect the
consumer where competition is both free and
effective ; because the power of rapidly changing
his source of supply at any time gives him
in these circumstances the best possible safe-
guard. Thus, as regards public interests, the
enquiry may safely be limited to the reform
of monopolies in private hands ; and, if so
limited, the main points to be considered are
the methods of ensuring to the consumer the
best possible return for his money — not only
immediately, but in the long run ; and, as
regards the taxpayer, what is usually known
as the capture of the unearned increment of
value.

As to the capture of the unearned increment
of value, here again we have a phrase from
the use of which we can hardly escape, although,
in truth, it is somewhat objectionable ; because
it tends to make us, like gamblers, think only
of gains and be blind to possible losses. In
rapidly - growing towns, franchises for the
establishment of gas-works, for example, are
very valuable possessions : possessions which
frequently keep increasing in value year by
year. The causes of this increase of value of

UNEARNED INCREMENT u

municipal monopolies need not here be dis-
cussed ; but certainly they are largely beyond
the control of their private proprietors. Is it
right, then, that these private proprietors should
reap the bulk of the benefit of this increase of
value? Obviously not, especially if, like the
gambler, we may be blind to their possible
losses ; and arrangements should always be
made, when new franchises are being granted,
for the capture of this unearned increment of
value for the benefit of the public.

In the case of the industries here described
as the newer monopolies, this end is gained
in England by making the franchises granted
to their owners terminable in a given number of
years ; twenty-one, as already remarked, in the
case of street railways, and forty-two in the
case of electric lighting works. At the termina-
tion of these franchises, the cities in question
can enter into possession of these works, and
thus acquire for themselves any growth of
value which had occurred during these periods ;
or, if the private corporations be then permitted
to retain the management, the same result can
be equally well obtained by the rents paid to
the cities then being raised. It is true that,
during the currency of a franchise, a private
corporation may gain somewhat on account of

12 PRIVATE INDUSTRY

any unexpected growth of the city. But this
is in reality a comparatively small matter ;
especially if unexpected losses be taken into
account. Thus, if a system of terminable
franchises be adopted, the capture of the un-
earned increment of value from the private
proprietors of municipal monopolies in reality
presents no serious difficulties.

We are, however, discussing private industry
mainly with the view of comparing it with
municipal ownership ; and it is obvious that
this increment of value (as well as any
decrement of value) of municipal monopolies
will fall undiminished into the lap of any city
which actually builds and manages such
industries. Moreover, if a city owns its own
street railways, for example, but, instead of
managing them, leases them out to a private
corporation for management, it can capture the
unearned increment of value at the termination
of the lease by raising the rent. Thus, under
any system of municipal ownership, the un-
earned increment can be captured ; and in this
respect there is little to choose between muni-
cipal ownership and private industry : pro-
vided that with private industry the private
proprietors are granted franchises for short
periods only. Unfortunately, both here and in

PRICE AND QUALITY 13

England perpetual franchises have frequently
been granted ; and, as long as this mistake
continues to be made, so long will municipal
ownership undoubtedly continue to present
advantages as regards the capture of the un-
earned increment.

Most citizens will, however, be interested,
not so much in the dry bones of a future
unearned increment of value, but rather in
present prices : a point as yet untouched. The
owners of monopolies would doubtless, if
permitted, charge the price which would bring
them in the greatest profits ; and this price
would, as a rule, be considerably higher than
that which would be charged by the same
corporations if subject to free competition.
How, then, is the owner of a franchise of a
municipal monopoly to be forced to charge com-
petitive prices ? If perpetual franchises are
to be granted, the difficulty of controlling the
private proprietor appears to be insurmount-
able ; because it is impossible to include,
within such franchises, provisions framed to
meet all the many alterations in the conditions
affecting prices which must occur as years roll
on. In the franchises for English gas-works,
sliding scales of prices dependent on the
dividends paid are, it is true, always included.

i4 PRIVATE INDUSTRY

Some provision of this kind should always be
inserted in franchises ; but it is quite impossible
thus to solve this problem completely.

If, however, franchises are granted for short
periods, as in the case of street railways in
England, comparatively little difficulty need
be experienced in regulating prices or fares.
During the currency of a franchise, the threat
to expel the private proprietor at its termination
is a powerful weapon in the hands of the civic
authorities, greatly assisting them in making
unreasonable corporations see reason ; and at
the expiry of a franchise, a new scale of prices
could always be arranged. This is, in truth,
but another way of indicating the advantages
with reference to the capture of the unearned
increment of value which cities may obtain by
retaining the right to terminate all franchises
granted to private proprietors.

Thus far only the price of the goods
supplied, and not their quality has been con-
sidered ; whereas price always means the price
of goods of a known standard of quality. In
certain cases it may not be easy to clearly
define in words a measurable standard of
quality. But, as regards water, gas, and elec-
tricity no such difficulty arises ; and, granted
that the franchises are properly framed, all that

TERMS OF FRANCHISES 15

is required as regards quality is the appoint-
ment of inspectors not open to corrupt influences
— a condition more easily stated than complied
with.

No doubt, when a franchise has been granted
to a private corporation for a limited period,
considerable difficulties may arise during the
currency of the franchise and at its termination.
Whether this will be the case or not depends
mainly on the care bestowed on the framing
of the franchise. Obviously the rent, if any,
to be paid by the operating corporation to the
municipality, and the scale of prices permitted
to be charged, must be laid down. But in
addition to this, the system of valuation to be
adopted in determining the value of the works
at its termination should be clearly defined.
The right to inspect the works and the books
of the private proprietors should be retained
by the civic authorities. The watering of
capital should be prohibited as far as possible ;
and corporations should be rendered incapable
of transferring their rights to others without
permission. Lastly, as a rule, an absolute
monopoly should be granted to one corporation
for a given district. Time makes it impossible
for me to argue in favour of all these pro-
visions thus imperfectly outlined ; but both

16 PRIVATE INDUSTRY

theory and experience point to the conclusion
that, if they were always included in franchises,
the civic authorities ought to be able to ensure
the public being well served, and there would
be no reason why the transfer of the business
of any municipal monopoly from one corpora-
tion to another, or to the city itself, would
present any great difficulties.

But even if a decision be arrived at as to
the general nature of the provisions to be
inserted in franchises, yet it must not be
supposed that it is easy to decide on the exact
terms which should be enforced. With regard
to all regulations as to the control of private
industry, there are opposing aims which cannot
be reconciled ; and it is only possible to seek
for the wisest compromise between them. As
in so many social questions, the conflict is
often that between present benefits and future
benefits. The present benefits in this case
consist either of low prices paid by consumers,
or of high rents paid by the operating corpora-
tions ; whilst the future benefits to be held in
view are those which would result from rapid
commercial progress. If a Local Authority,
desirous of seeing electrical works established,
for example, is too rigid in its demands as to
the price of the electricity, it may be a long

FRANCHISE PERIOD 17

time before private promoters will come
forward to undertake the work. Thus to clog
the wheels of industry might inflict an im-
mediate injury on the public which would
far outweigh the ultimate benefits resulting
from rigid provisions as to price and quality.
Scales of prices must be so framed as to make
it reasonably certain that corporations will be
able to obtain the normal rate of interest on
their capital ; for, if this be not done, the
future will be sacrificed in a futile attempt to
grasp at present benefits.

Difficulties of the same type arise with
regard to the number of years for which
franchises should be granted. The shorter
the period, the sooner, it is true, will the city
be able to appropriate any increase in the
value of the industry due to its own growth.
But the profits made by nearly all under-
takings are at first small as compared with the
capital invested ; because the business begins
to grow but slowly, and, during that growth,
the capital expenditure must be on a scale
suitable for a larger output than that demanded.
A corporation, so it is urged, must be granted
security of tenure for a considerable number of
years to enable it to recoup itself for its suffer-
ings during the initial stages of its existence.

c

i8 PRIVATE INDUSTRY

In other words, very short franchises, as ordi-
narily framed, will not tempt the investor suffi-
ciently to induce him to invest his money in
the industry in question. In England con-
cessions, as they are there called, were at first
granted to corporations for both street rail-
ways and electric lighting works for periods of
only twenty-one years ; and the effect was to
greatly cripple these industries. This may be
illustrated, as regards electric street railways, by
the fact that there were 15,000 miles in operation
in 1900 in the United States, as compared with
less than 1,000 miles two years later in Great
Britain. As to electric lighting, it is hardly
an exaggeration to say that the English
legislation of 1882, with its limitation of twenty-
one years for franchises, utterly paralysed that
industry — a paralysis from which it showed no
sign of recovery until 1888, when the franchise
period was increased to forty-two years. As
regards both these industries, my country has
undoubtedly been left far behind some other
countries in the industrial race ; and, in my
opinion, this is largely due to the action of
the legislature and of the municipalities in
endeavouring to enforce too rigid conditions.

But why were these restrictions imposed if
they were, in truth, so harmful ? Was it merely

FRANCHISE PERIOD 19

that, whilst the advantages of short franchises
were perceived, their disadvantages were not
at first foreseen or were never admitted ? Such
an explanation, no doubt, partly accounts for
the English method of controlling private
corporations ; but only partly, for other power-
ful influences have been at work. The
advocates of municipal ownership have great
power in the House of Commons, and their
object is always to leave a door open for the
direct management of municipal monopolies.
Long-period franchises would obviously post-
pone the possibility of municipal ownership
for a long time, and against them persistent
opposition has been maintained. The crippling
of the electric industries of England, due to
the short period of the franchises granted, is
therefore, in my opinion, mainly the indirect
result of the desire for municipal ownership
on the part of the civic authorities in that
country.

There is, however, another method of attract-
ing capital besides that of granting long-period
franchises. At the termination of a franchise
period, if the works are to be bought com-
pulsorily by the civic authorities, they must
be valued ; and in England the method of
valuation is such that corporations do not get

20 PRIVATE INDUSTRY

compensation for either formation expenses or
initial losses. Private proprietors therefore
object strongly to this damaging blow being
inflicted at an early date. But there appears
to be no reason why the system of valuation
should not be such as to afford a reason-
able compensation to corporations at whatever
date they are bought out. With short-period
franchises, combined with a more liberal
system of valuation, capital might be attracted
quite as certainly as by the existing English
system of long -period franchises adopted for
electric lighting works. Unfortunately, reform
has not been sought in this direction.

Before leaving this subject, one strong
objection to short -period franchises must be
briefly mentioned. Whenever the date is
reached at which a corporation may be bought
out by the civic authorities, then will be the
moment at which corrupt influences are most
likely to show themselves ; and the shorter
the franchise period, the more often will these
dangerous epochs occur. This, no doubt,
affords a serious argument in favour of long-
period franchises ; although, in my opinion,
the difficulty would best be met by permitting
cities to buy out corporations owning franchises
at all times under a reformed system of valua-

REASONABLE PROFITS 21

tion, there being, therefore, no fixed recurrent
dates at which the demon of corruption is
especially likely to be roused. This question
of corruption will, however, be dealt with in
a subsequent lecture.

But, whatever be the exact terms of the
franchises granted to the private proprietors
of municipal monopolies, it is, at all events,
folly to trust to private enterprise, and at the
same time to strangle it at its birth. It is,
in fact, impossible to obtain ultimately all the
benefits due to rapid commercial progress,
stimulated by large profits to shareholders, as
well as all the possible immediate benefits due
to rigid terms as to price and rent. A com-
promise must be made between these antagon-
istic ideals, and that compromise must be one
which is fairly satisfactory to the investing
public. Justice does not demand any special
consideration being shown either to promoters
or to capitalists as such. But our policy must
be influenced by the fact that by shutting
them off from all chance of earning reasonable
profits, we may thus injure rather than benefit
all other classes.

The regulation of the private ownership of
municipal monopolies is, therefore, a matter
of considerable difficulty, and in England, at

22 PRIVATE INDUSTRY

all events, it leaves much to be desired. But
English experience does indicate, it appears
to me, that even with the existing defective
legislation, fairly satisfactory results can be
obtained by trusting the management of
municipal monopolies to private corporations
with franchises for short periods. In Massa-
chusetts some excellent legislation on this
subject has been passed ; but even here pro-
bably more remains to be done ; whilst a wide
field is open to the reformer in other States.
It is very desirable that more interest should be
aroused on this side of the question, because this
would probably result in private industry being
everywhere more wisely controlled.

Advanced socialists will no doubt declare
that they care nothing for reforms which are
not avowedly communistic ; for they hope to
see all industry owned and managed by the
representatives of the people. But every sane
and temperate man, even if he be a socialist,
must see that private industry will not be
abolished entirely for many years to come.
Individualists, on the other hand, hold that,
as regards most industries, private enterprise
will always produce the best results. In fact,
whether we think that private industry is to
remain with us for ever, or whether we think

PRELIMINARY ENQUIRY 23

that it is only to be tolerated as a necessary
step in social evolution, we must agree that its
proper control will for a long time be a subject
of great practical importance. The advocates
of municipal ownership now draw the larger
audiences ; but whoever will play the less con-
spicuous part of endeavouring to improve the
methods of regulating private industry will be
doing admirable service for his country.

Thus far I have endeavoured to point out
that there are two methods of reform open to
us when dealing with municipal monopolies
in private hands. There is the conservative
method of reforming the control over private
industry ; and there is the drastic method of
municipal ownership, as it is not too aptly
termed. The second of these methods, that
of municipal ownership, must now be con-
sidered. But this preliminary enquiry con-
cerning the control of municipal monopolies
has been necessary in order to indicate that,
if it should appear as regards any industry
that municipal ownership would be an improve-
ment on private industry as now conducted,
it does not follow that it would be better
than private industry controlled by regulations
which the nation might adopt at any time if it
saw fit.

24 LOCAL TAXATION

MUNICIPAL OWNERSHIP AND
LOCAL TAXATION

As regards many social questions, the argu-
ments for and against any proposed reform
can be set forth like the briefs of opposing
counsel when pleading before a court. But,
in the case of municipal ownership, almost
every subject-matter for discussion has been
used in the foundations of the arguments of
those who are pleading both for and against this
method of dealing with municipal monopolies.
First to take the whole case on one side, and
then to take the whole case on the other, would
involve a considerable amount of repetition ;
and it is, therefore, more convenient to discuss
one subject after another, and to consider the
bearing of each on the whole question. And
the first subject here to be dealt with will be
that of finance.

The finances of municipal industry, though it
certainly is not the most important topic to be
considered, is the part of this controversy
which is most discussed in England. Questions
connected with civic purity and sanitation are,
however, in my judgment, more important.

FINANCIAL QUESTIONS 25

Moreover, although money affords the best
method of weighing human desires for goods
for immediate consumption, and, although
economists are right, therefore, in making
price a subject to be treated at length ; yet,
when weighing either future benefits against
present benefits, or precautions as to health
and morality against other immediate wants,
price is a very fallible guide. These con-
siderations, which tend to lessen the importance
of finance in all social questions, are not,
however, the only reasons why other subjects
should take a more leading place as regards
municipal ownership ; for the discussion on
which we are about to enter will show that
no very substantial gains or losses have been
sustained by England as a whole because of the
indulgence of its cities in municipal industry.
This is, however, somewhat anticipating the
result of that discussion. But it is very
important to note from the first that any con-
clusions which may be arrived at from a study
of English municipal statistics can only be
held to be sound in so far as the experiences
of England may be taken as a sure guide,
and on the assumption that municipal owner-
ship is not to be adopted to a greater extent
than it is now practised in England. If

26 LOCAL TAXATION

more industries were municipalised than is
usually the case in England, the financial
effects might become very important.

Two questions were suggested as being those
most likely to bring us quickly to the heart of
this controversy ; and of these, the second was
as to when it would be best in the interests
of the community at large that municipal
services should be undertaken by employees
in the direct pay of the civic authorities?
In other words, when is direct employment
advisable? As regards municipal industry in
England, it is nearly all carried on by directly
employed labour. It is true that, in the Govern-
ment statistical returns, there are included
certain street railways leased out to private cor-
porations ; but these will be always omitted in
any figures relating to municipal industry here
quoted. We shall therefore be dealing with
industry entirely or almost entirely operated
by direct employment. It is true that most
of these industries were bought from private
corporations and that the works themselves
were for the most part built by private pro-
prietors ; and also that some works have been
built or added to by contract for the muni-
cipalities now owning them. Thus very few
municipal works in England both have been

DIRECT EMPLOYMENT 27

built and are now being operated by directly
employed municipal labour ; and unfortunately
these few cannot be separated from the rest.
If they could have been studied separately, the
financial results thus obtained might have
been more conclusive than those now obtain-
able. As it is, all we can do if we wish to
study the financial results of direct employment
in England is to make these statistics of the
municipal industries of that country form the
basis of our enquiry. In other words, we can,
and we must, study the finances of direct
employment and of municipal ownership at
one and the same time.

The imperative necessity of regarding all
sides of social questions has already been
insisted on, and nowhere has this precaution
been more flagrantly neglected than in the
popular discussions concerning the finances of
municipal ownership. Hundreds of extracts
from English newspapers might be quoted,
each pointing to the profit made in a particular
municipal enterprise, the inference being drawn
that local taxation had in consequence been
thus reduced : and this, apparently, without a
thought having been given by the writers as to
the exact meaning to be attached to these state-
ments. Do they point to a comparison with

28 LOCAL TAXATION

a state of affairs when the cities in question
had no street railways, if that were the profit-
making industry? Obviously not; because
street railways would have been built, whether
municipalised or not. The meaning of any
such statement must therefore be that a certain
city has made a profit of so many dollars by
a municipal industry ; whilst, had the industry
in question remained in private hands, no such
sum would have found its way into the muni-
cipal treasury, and taxation would not thus
have been reduced.

Assuming this to be the meaning intended
to be conveyed by these statements, can they
be accepted as giving an accurate representa-
tion of the facts? In Birmingham, for example,
the street railways were until recently managed
by a private corporation, which paid a con-
siderable rent to the city for its privileges.
The franchise period expired, and the muni-
cipality had to choose between again leasing
out the street railways to a private corporation
and managing them itself. The decision was
in favour of municipal management, and the
city itself began to make a profit on its newly
acquired industry. But it cannot be said
that taxation was thus reduced by an amount
equal to this profit ; for the fact that a rent

GAINS AND PROFITS 29

was no longer receivable must be taken into
account. Possibly the point at issue may be
made more clear by means of figures. Let
it be assumed that a private corporation was
paying a rent to a city of $200,000 a year for
a street railway franchise ; that this industry
was municipalised ; and that subsequently the
city only made a profit of 8100,000 ; that is
$100,000 less than the amount previously
received in the form of rent. Should we say
that the city was making a profit of $100,000 a
year by the street railways it had municipalised?
Or should we say that it was losing a like
amount by that venture? Both statements could
be logically justified.

The truth is that the English language is
deficient in words for our purposes. But, to
make the best of those we have, the figure indi-
cating the balance of the working account of a
municipal industry will here be called the profit
or the deficit, as the case may be ; whilst the
figure indicating the comparative decrease or
increase of the total financial burden falling on
the citizens in consequence of the municipalisa-
tion of an industry will be called the gain or the
loss, as the case may be. Thus, any increase of
expenditure and any income foregone as the result
of a municipal industry being undertaken must be

30 LOCAL TAXATION

deducted from its profits in order to ascertain the
gain. This is not, it must be admitted, a very
happy choice of words ; for it is necessary to say,
as regards the imaginary case just quoted, that
the city was making at the same time from its
venture both a profit and a loss of $100,000 a
year ! Any suggestion as to a more suitable
phraseology will be gladly accepted. But if it
were asserted that a city showed a profit on its
industries, whilst the ventures in question ought
to be regarded as being run at a loss to the city
because of rents larger than the profits having
been foregone, here the words profit and loss do
not appear out of place, although used as defined
above.

Accepting the definitions of these words, it will
at once be admitted that the question of gain
and loss is far more important than the question
of profit and deficit. Yet it is the profits of
municipal industries to which reference is per-
petually being made. How, then, are we to
arrive at the more important figure representing
the gain, or the net effect on the community
generally? No very satisfactory answer to this
question has as yet been suggested.

One method of arriving at the desired result,
which at first sight appears to be very simple, is
to compare the taxation in cities where there is

STATISTICAL RESULTS 31

much municipal industry with the taxation in
cities where there is but little. If it could be
proved that local taxation always varied inversely
with the amount of municipal industry under-
taken, then it would be safe to conclude that
municipal industry reduced the taxation or was
a gain in this respect. Many doubts and diffi-
culties, however, beset this enquiry : the first to
be met with being the choice of fair lists of cities
for comparison. Only one single investigation
of this kind, which has been made in an impartial
and scientific manner, is known to me ; and the
result of this investigation shows that municipal
industry appears to be associated in England
neither with high nor with low local taxation.1
It is, however, somewhat puzzling at first to find
that an increase in the municipal industry in any
city is quite undoubtedly associated with an
increase in taxation. Citizens may therefore
with confidence look forward to an immediate
increase in their local taxation if the city in which
they dwell begins to tread the path of municipal
industry. This apparent contradiction may be
explained in more ways than one. It may be
that the ultimate gain cancels the initial loss, and
that in this way, on the average, no gain or loss

1 Miss Alice Lee, Economic Journal^ September 1903,
p. 424.

32 LOCAL TAXATION

on municipal industry is made. Or it may be
that the same spirit which makes civic authorities
municipalise many industries induces them also
to be either progressive or extravagant in other
directions. Thus this method is surrounded by
difficulties ; the results are somewhat difficult to
interpret ; and, moreover, no account is taken of
the relative level of prices in municipal and in
private industry. We are therefore, perhaps, not
justified in accepting the conclusions arrived at,
as more than an indication that English cities
make neither great gains nor great losses by
their industrial ventures. This is certainly not a
satisfactory conclusion to arrive at, and it would
be most desirable, if possible, to find some more
certain method of ascertaining the financial effect
of municipal ownership.

LECTURE II

MUNICIPAL STATISTICS

IN my last lecture I began to deal with the
financial aspect of municipal ownership, which
is, in truth, the most unsatisfactory part of this
whole controversy. In it we appear all the
time to be sailing in a fog, through which,
I fear, I cannot pilot you to any very secure
resting-place. What we wish to ascertain is
whether English municipalities gain by their
municipal industries, not merely whether they
make a profit thereon. The method of attempt-
ing to arrive at a conclusion on this point
already discussed, namely, the consideration of
the question whether cities where municipal
industry is extensively practised are taxed
more or less heavily than those which trust
largely to private enterprise, was found to be
full of difficulties ; and it is, perhaps, wise to
quote the results only as indicating that no
great gains or losses result from municipal

33 E

34 MUNICIPAL STATISTICS

industry in England. We are therefore still
groping our way in the fog.

Another possible method of attacking this
problem is to ascertain, in the first place,
what are the profits made by a city out of its
municipal ventures ; and, in the second place,
what are the sources of income which it fore-
goes in consequence of its abandonment of
private industry ; and, finally, by deducting
this foregone income from the profits, to obtain
the actual net gain to the city. This is no
doubt the commonest way of trying to solve
this problem, the necessity of making any
deductions from the profits being, however,
frequently forgotten by the advocates of a
forward municipal policy. An attempt will
now be made, without any such lapse of
memory, to arrive at definite conclusions by
this method.

Manchester makes so many thousand dollars
a year out of its gas-works, and why should
not we do the same ? This is the most elemen-
tary form of the usual financial argument in
favour of municipal ownership. But even if
nothing else had to be said, it must be admitted
that, in all social questions, averages are more
trustworthy as guides than single instances.
We see sometimes in fruit shops that only the

AVERAGE RESULTS 35

best of the fruit is exposed to view at the top
of the baskets, it being evidently intended that
the simple-minded customer should judge the
whole by these especially selected specimens.
Now the methods of such vendors are not
wholly dissimilar to those adopted by those
advocates of municipal ownership who are
constantly harping on the profits of municipal
gas-works, which are no doubt considerable,
whilst maintaining a discreet silence with
regard to the net profits of English electrical
lighting works, merely because they happen to
be a negative quantity. On the other hand,
if we could conceive the object of a salesman
being to prevent the public from buying his
goods, the least tempting fruit would be
exposed to sight ; and this would be similar
to the practices of certain opponents of muni-
cipal industry who do nothing but harp on
the subject of municipal failures. If selected
specimens cannot be trusted in the buying
of fruit, this is equally true in judging of
municipal industries ; because each industry
is subject to exceptional conditions, and the
errors thus introduced can only be eliminated
by considering the average of the results of a
considerable number of industries.

This point may, perhaps, be illustrated by a

36 MUNICIPAL STATISTICS

reference to English gas-works, on which the
profits, as already remarked, have been con-
siderable. The amount of the profit made
obviously depends on the price charged for the
gas ; and, since this industry is practically a
monopoly, this price is regulated to a large
extent by custom or example. English private
gas-works have very unwisely been granted
perpetual franchises ; and on this account it
is not improbable that they are now charging
prices above what may be described as the
competition level, with a corresponding increase
of profits. It follows that if English muni-
cipalities have been at all influenced by the
example set by these private corporations as
regards the price charged for gas, their profits
also will have been swollen in like manner :
an influence not felt in English municipal
electrical works, because perpetual franchises
have not been granted to the owners of private
electrical enterprises. The profits of municipal
gas-works taken separately ought not, there-
fore, to serve us as a guide.

On similar grounds, the consideration of
the profits obtained in single cities should be
barred. We must not pick and choose our
examples ; because the exceptional conditions
obtaining in any one city may modify the

PROFITS IN ENGLAND 37

results there obtained so as to make it
impossible for other cities, where no such
exceptional advantages exist, to follow its
example. Good results in municipal industry
may, for example, be partly attributable to ex-
ceptional business capacity on the part of a
local governing body. But town councillors
who claimed to possess this exceptional advan-
tage— that is, to be wiser than the average of
other town councillors — would certainly gener-
ally be held by others to be in reality unwise
themselves. They should not refuse to be
guided by averages, and should avoid the
consideration of separate cities or industries;
and we should do the same.

Looking, therefore, only to the average financial
results of municipal ownership, possibly the best
way to indicate in the fewest words the general
situation in England is to liken the whole
municipal industry of that country to a large
industrial corporation. Judging by a return
made to Parliament in 1902, the capital put
into this great municipal venture at that date
was $600,000,000 J ; whilst the interest paid to
the shareholders, to continue the simile, was
nearly $23,ooo,ooo,2 or a little under 4 per cent.

1 ;£ 1 20,000,000. Round numbers only are given in these
lectures. 2 ^4, 500,000.

38 MUNICIPAL STATISTICS

on the capital. But it must not be supposed
that this sum, which I have likened to the
interest to shareholders, found its way un-
diminished into the municipal treasuries. In
establishing these industrial concerns, not only
had large debts been incurred, the interest on
which had to be provided out of the gross
profits ; but sinking funds had also to be
provided, it being obligatory in England that
all municipal industrial debts should be paid off
in a given time. Thus less than $2, 000,000 x
went to the relief of taxation : a sum, however,
which will increase continually as the debts
are liquidated, until in time English munici-
palities, so it may be urged, will enjoy the full
income of $23,000,000 2 without any deduction
for interest or sinking funds.

It should, however, be noted that if none
of the debts had been liquidated at the date
of this return, the interest and charge for
sinking funds on the whole capital provided
would have been more than the $23,000,000 2 ;
and a small net deficit would have been shown,
instead of this small net profit of about
$2,ooo,ooo.1 In other words, in so far as these
average results in England may be taken as
a guide, we ought to anticipate, when a new
1 ,£360,000. 3 ,£4,500,000.

PROBABLE DEFICIT 39

municipal industry is being established, that
a slight deficit would at first be made : a
deficit which would be converted into a fairly
substantial profit some forty years afterwards,
when the debts were all liquidated.

Thus painted the financial picture is not
unpleasant to look at; for, although it appears
that a city establishing a municipal industry
ought to anticipate a probable deficit, yet this
deficit would probably be so small that the
citizens ought to be willing to run this risk
for the sake of material future profits. If all
my fellow-countrymen were to be convinced
that each new municipal venture would prob-
ably add to the immediate burden of local taxa-
tion, this movement would no doubt receive
far less support than it does at present, even
though this, in truth, afforded no proof that
municipal industry was on the whole financially
disadvantageous. There are, however, many
other circumstances which ought to be taken
into account, some of which tend to brighten
this picture, but more to tarnish it. As an
example of the former, there will be found
amongst the enterprises included in this return
such services as baths, wash-houses, and
burial grounds ; which certainly were not
undertaken with any idea of making a profit.

40 MUNICIPAL STATISTICS

But even if these items are entirely omitted,
the interest on the remainder is only raised
to about 4 per cent, on the total capital pro-
vided. On the other hand, English municipal
accounts, although they are on the whole well
kept, have been subject to telling criticism,
with the object of proving that the profits of
these municipal ventures are not really so
high as they are thus shown to be.

These questions connected with accounts are,
however, too technical here to be dealt with
at length ; and only the most important of
all these criticisms will be mentioned — namely,
that with regard to the depreciation in the
value of municipal property. According to
the above-mentioned return, the amount set
aside to meet this depreciation is less than
|th per cent, on the total capital ; and
it can hardly be denied that this is very
inadequate. Municipal authorities may, how-
ever, rightly urge that the citizens of to-day
are paying off the whole debts incurred in
starting these enterprises ; and that they are
in effect presenting these industrial works as
a free gift to posterity. Posterity, they may
add, has no right to grumble if called upon,
when possessed of these free gifts, to put them
in good repair, and the present generation

DEPRECIATION 41

is not, therefore, under any obligation to create
a large depreciation fund. This is sound
enough. But those who use such arguments
in effect admit that further capital expenditure
for these industrial concerns will be necessary
in future, and that, consequently, the gross
profit of $23,000,000 will never find its way
undiminished into the municipal treasuries of
posterity. If full commercial depreciation were
charged, as it ought to be, at all events, for the
purposes of this argument, it would then be
seen that the gross profits to be anticipated in
the future would be materially less than the
figure above mentioned.

But even if a careful investigation should
prove that English municipal industries will
in future be a source of considerable profit to
the cities concerned — this is certainly not the
case at present — yet this would tell us nothing
whatever as to whether these cities, in truth,
gain or lose by these enterprises. Whatever
certain advocates of municipal ownership may
do, we must not forget to look at the other
side of the question, and to consider what
sources of income these cities have foregone
by transferring these industries from private
to public ownership.

The circumstances which have to be taken

F

42 MUNICIPAL STATISTICS

into consideration in fairly estimating the
gains and losses due to municipal ownership
are too numerous all to be mentioned here.
Many of them arise from the fact that a city
has, as it were, two pockets for money — an
industrial pocket, and an administrative pocket ;
and it appears at first sight to matter but little
which pocket is used. Town councillors, who
have established some industrial enterprise,
like to show good results ; and, when it can
be so arranged, they naturally desire to avoid
drawing money from the industrial pocket.
The sin may be but a trifling one, for no one
may be directly injured, the result merely
being that the causes of any industrial loss,
namely, unavoidable failures or honest blunders,
are kept in a subdued light. Councillors are,
after all, human beings ; and, where all are
thus tempted, some will fall. As a single
instance of the possible effect of this human
weakness, the lenient assessment of municipal
property may be mentioned. A tax on
municipal industries is merely, it may be
thought, a useless transfer of money from the
industrial to the administrative pocket ; and a
very inconvenient transfer when the contents
of the industrial pocket are running low.
Thus a city's industrial property may be more

DEDUCTIONS FROM PROFITS 43

lightly assessed in England than if that same
property had remained in the hands of a private
corporation. But, where this is the case, the
additional tax, which would have been received
from the private corporations had they re-
mained as the owners, must be deducted from
the profits shown in the city's industrial
accounts in order to ascertain the true gain to
the city resulting from its municipal enter-
prises. In England this is probably not a
very important point ; but if I am right in
supposing that municipal property is not taxed
in the United States, here this may be a very
important deduction from municipal profits,
and the point is one which must by no means
be overlooked. Anyhow, it affords a convenient
illustration of the many difficulties which are
met with in comparing the finances of municipal
and private industries.

Several other circumstances might also be
mentioned which in like manner throw a
doubt on the validity of accepting municipal
profits as being an indication of municipal
gains : as, for example, the possibility of charg-
ing the administrative account too highly for
the lighting of public places, or of including
in that account the capital expenditure for the
widening of streets for street railways. All but

44 MUNICIPAL STATISTICS

one of these possible criticisms will be passed
over in silence ; that one being so important
that it must be briefly considered. For the
purpose of illustrating the point in question,
take the case of a landowner who owns a farm
which has just fallen into his hands at the
termination of a lease, and who is doubting
whether or not he had better farm the land
himself. In these circumstances there certainly
never was a landowner so stupid as to forget
the fact that, by farming the land himself, he
would forego the rent he might obtain from a
farmer if he were instead again to lease out the
farm. Yet it seems that a blunder closely akin
to this is constantly being made with regard
to municipal ownership, the rent which might
have been obtained from private managers
being overlooked. Taking street railways as a
convenient example, they are divided into two
classes in the Parliamentary return of 1902,
already mentioned, namely, those owned and
worked by municipalities, and those owned
by municipalities and leased out to private
corporations for working. These returns un-
doubtedly indicate that those civic authorities
who lease out their street railways to private
corporations make a larger gross profit on a
given capital than those who work them

STREET RAILWAY RENTS 45

themselves ; the gross profit being equivalent
to the net profit which may be anticipated
when all the debts are liquidated. As to
the immediate results the case is not so clear ;
but the figures indicate that a city should
expect to obtain, whilst the debts remained
unredeemed, a net profit of about ^ths per
cent, on the capital, by working its own
railways ; whilst by leasing them out it might
expect to make about 2 per cent., provided
that the same conditions held good in the
two cases as to sinking funds. But if a city
only makes less than i per cent, by municipal
management, whilst it might have made 2
per cent, by leasing, may we not fairly say it
is losing over i per cent, by its municipal
venture? Such calculations are untrustworthy
for various reasons ; but we may, at all events,
fairly conclude that the fact that English muni-
cipally-managed street railways are making a
profit is consistent with the belief that English
citizens would have been less heavily taxed
had none of the street railways been worked
by the direct employment of municipal labour.
As to the other industries which are managed
by civic authorities in England, rents could in
many cases have been drawn from private cor-
porations had they been granted the necessary

46 MUNICIPAL STATISTICS

franchises enabling them to undertake the
management ; though, it is true, we have no
means whatever of estimating how large these
rents would have been. No doubt, as regards
certain industries, had they not been muni-
cipalised, they would have been managed by
private corporations with perpetual franchises
rent free, the English law being what it now
is ; and the cities in question would have been
in receipt of no income from them. But under
a reformed system of legislation with regard to
private industry, we may safely assume that a
very considerable sum would have been flowing
in the form of rent from private corporations
into the municipal treasuries had no muni-
cipal industry existed ; and this sum ought
to be deducted from the municipal profits in
order to estimate the advantages or dis-
advantages of municipal industry compared
to well-regulated private industry.

Accepting the foregoing as being the results
of a study of English municipal statistics, an
endeavour must now be made to draw general
conclusions therefrom. Judging by average
results, it was seen a city, when starting any
new municipal venture, ought to expect to
make a small deficit as long as the debt
remained unredeemed, and to have to make

GAIN NOT PROBABLE 47

good this deficit by additional taxation. It
was also seen that, not only would this
anticipated deficit probably be larger than the
Government returns appear to indicate, but
that, in order to ascertain what would be the
loss at first in consequence of the abandon-
ment of the system of private industry, the
rent which might have been drawn from a
private corporation must be added to that
deficit to ascertain the loss : a rent which,
judging from the average results of English
street railways, would amount to 2 per cent,
on the total capital. English statistics, there-
fore, do not disprove, and may, it appears
to me, be quoted as giving some support
to the view which I hold, namely, that English
cities have increased the immediate burden of
taxation by their municipal ventures by over
i per cent, on the capital sunk thereon. This
conclusion will, perhaps, be readily accepted
until it is seen what further deductions can
be made from it. The sinking funds which
English cities are obliged to find for the
redemption of their industrial debts amount to
a little more than i per cent, on the capital
thus sunk ; and if it is true that the taxation
is increased by a like amount in consequence
of these ventures, it follows that this sinking

48 PRICE AND QUALITY

fund is in reality all drawn from the pockets
of the people by additional taxation ; or, in
other words, that every penny which English
cities have invested in industrial ventures has
been raised by taxation which would not have
been raised had the industries in question not
been municipalised. The profits which will
eventually be made out of municipal industries
consist, therefore, of nothing but the interest
on the invested savings of the people : an
interest which each individual might have
obtained for himself had the money not been
drawn from him by taxation. If this be a
correct view of the situation, it seems fair to
conclude that England, if she is not losing,
is gaining nothing whatever by her municipal
enterprises.

PRICE AND QUALITY

Complicated as has been this discussion, it has
been simplified by leaving out one whole side of
the question, a side which in reality cannot be
omitted, if sound conclusions are to be reached.
It may be said, and it has been said, that muni-
cipal industry does not, it is true, result in any
direct financial gain to the municipal treasuries,
but that the goods thus supplied are both better

DIFFICULTIES IN COMPARISONS 49

and cheaper than those supplied by private pro-
prietors. The result is, so it is urged, a gain
to the consuming public. This is a legitimate
argument in favour of municipal ownership in
so far as facts can be brought forward to sub-
stantiate it ; and it should therefore be examined.
Time makes it impossible, however, for me to
dwell at length on the questions thus opened
up for consideration ; nor is it very desirable
to do so, if, as is probable, the result would
be to thicken rather than to lighten the fog
through which we are passing. A few words
must, however, be said.

Figures have no doubt been quoted to prove
that the price charged for gas in England by
private corporations is higher than that charged
by municipal gas-works. The difficulty in such
comparisons is to eliminate all the other elements
of difference besides the one the results of which
we wish to investigate. In all the published
results known to me, it appears that the popula-
tion supplied by each private gas-works is on
an average smaller than the population supplied
by each public gas-works ; and it is probable,
therefore, that the private gas-works supply less
densely populated areas. But gas-works in
scattered districts cannot produce gas as cheaply
as works in more crowded districts ; the chief

O

50 PRICE AND QUALITY

reason being that the capital expenditure on gas
mains is proportionately greater. It is therefore
not improbable that gas from private works is
dearer, not because of the private management,
but because the population supplied is less
dense. In fact, municipal authorities, being free
to establish works everywhere, have generally
done so in the most favourable localities, only
the districts rejected by them being available for
the operations of private corporations. In such
investigations it is essential that all circumstances
affecting prices, such as the average relative
level of wages, the cost of materials, etc., should
be taken into consideration, or the results will be
more or less fallacious. For lack of such pre-
cautions, all existing comparisons of the relative
prices of gas, electricity, water, etc., produced
by municipal and by private industry are, in
my opinion, untrustworthy.

It is, moreover, not only the relative price, but
the relative quality also which has to be taken
into consideration. Even in those industries in
which comparisons of quality can be made with
accuracy, they will be as fallacious as the com-
parisons regarding price if the effects of all the
other elements of difference are not eliminated.
As regards water, gas and electricity, it is, for
example, doubtful whether, on the whole, the

QUALITY OF SERVICE 51

civic authorities do test their own productions
as rigidly as they test the productions of private
corporations. Again in some services, as, for
example, in the case of street railways, the quality
of the service supplied is largely a matter of
opinion ; and, in endeavouring to compare the
results of public and private management in
this respect, we can do little more than decide
on the weight to be attached to flatly contra-
dictory statements. The terms of the franchises
which have been granted to the private pro-
prietors must also be held in view when
comparing their performances with those of
civic authorities. For example, a private
corporation may be working a street railway
with the knowledge that it may be — and almost
certainly will be — bought out before long by
the municipality ; and the terms on which they
would be expropriated may make it impossible
for the private proprietors to adopt improve-
ments except at a risk of financial loss ; whilst
the municipal street railways, with which the
comparison is being made, are never hampered
in a similar manner.

Thus, whether we consider price or whether we
consider quality, it is now impossible to tell for
certain, by direct evidence, which supplies the
cheapest and best goods, municipal industry or

52 A PRIORI ARGUMENTS

private industry. It follows, therefore, that the
conclusions arrived at as the result of our
statistical enquiry — namely, that it is more
probable that cities are losing than gaining by
their municipal ventures — though it is rendered
more doubtful, is not contradicted by extending
the enquiry so as to include the questions con-
nected with price and quality.

A PRIORI ARGUMENTS

To those who are only acquainted with the
newspaper accounts of English municipal
industry, this result may, perhaps, appear sur-
prising. It may be as well, therefore, briefly to
consider on a priori grounds the probability of a
city making a gain or a loss on any industry
which it may undertake to manage. In a large
number of cases, English cities have bought
gas-works from private corporations, the price
paid being the commercial value of the industry
at the date of the purchase ; and these cases may
be regarded as being typical of municipal industry
generally without introducing any serious errors.
When considering such a transfer of property, it
is first to be noted that the income received from
the works, both before and after municipalisation,
may be divided into two parts: the first part

PROBABILITY OF A GAIN 53

being that paid away in management expenses,
including wages, cost of materials, etc. ; and the
second part being that available for the reward
of capital, or the interest on shares, stocks or
loans. These two divisions, which together
make up the total income, are received by the
private proprietors before municipalisation, and
pass into the municipal treasury after the works
become public property.

In order to discuss the transfer of these two
parts of the income separately, we may, in
the first place, assume that the city in question
will manage the industry neither more nor
less efficiently and economically than the
private corporation it succeeds ; or that the
amount of income absorbed by management
expenses after municipalisation will be the
same as it was before the transfer of the works.
We may also assume for the purposes of this
discussion that prices remain unchanged, or
that the consumer is not affected by the
transfer ; in which case the total income
received will obviously be the same before and
after municipalisation. But both the total
income and that part of it absorbed in manage-
ment expenses being the same, the remaining
income available for all other purposes must
be the same also. In other words, after

54 A PRIORI ARGUMENTS

municipalisation, the city, when it has covered
all the management expenses, will find itself
possessed of an income available for all other
purposes which is neither greater nor less than
the sum which the private managers had
previously paid away in interest to their share
and debenture holders. Now it has been
assumed that the works were purchased at their
true capital value ; and consequently, the sum
which the municipality must raise by way of
loan to effect the purchase represents what
was the capital value of the works whilst in
private hands. But all capital is drawn,
broadly speaking, from the same money market,
and the tendency is for all lenders of capital to
obtain the same reward for their services, or the
same real rate of interest for their capital, who-
ever be the borrower. The city will, therefore,
have to pay about the same amount in interest
for this given capital as was previously paid
away by the private proprietors in interest on
shares and loans ; and it will find, therefore,
that this being the total amount of its avail-
able income, it has nothing over for any other
purpose whatever. But in England cities are
forced to find sinking funds in addition to the
interest on loans. The conclusion, therefore,
at which we arrive, when municipal industry

INTEREST ON LOANS 55

is regarded in this broad a priori way, is that,
granted that no change takes place in the
management, the income just covers the whole
of the expenditure other than the charge for
the sinking fund, and that this sinking fund
must be covered by raising additional taxation ;
or, in other words, that a city gains nothing
and loses nothing by such a venture.

A reason frequently given for believing that
municipal ownership will be a source of gain
to a community is no doubt that municipalities
can borrow money at a lower rate of interest
than can private corporations : an argument
which directly traverses the conclusions just
arrived at. The investor who buys gas
corporation shares gets, it is true, a higher
immediate return on his investment than the
investor in city loans. But this is really not
to the point ; because the money is raised on
wholly different terms in the two cases. Private
corporations can only give their own works
and profits as security for capital and interest.
Municipalities, on the other hand, not only give
this same security — namely, the municipal works
and the profits thereon — but they in effect give
the whole real property of all the citizens as
an additional security. Thus a decline in
dividends or in value is vastly more probable

56 A PRIORI ARGUMENTS

in the case of corporation stocks than in the
case of the loans of great cities. What we want
to know is the average over a long period of
the total payments made by corporations to
capitalists, calculated as a percentage of the
total money expended on the concerns in
question. Is this percentage higher than the
interest paid by cities for their loans? There
is no statistical proof that it is higher, and
no proof, consequently, that cities initiating
industries can make a profit because of their
method of raising funds. Moreover, it is the
gains that we are considering, not the profits.
A city might often make a profit by buying
gas-works, and by then raising the price of
gas. Profits may also be insufficient to cover
the interest on industrial loans, and additional
local taxation may be raised to make up the
deficit. And if prices be thus raised, or if
taxation be thus increased, this increase in
the burden on citizens must for the purposes
of comparison be added to the interest pay-
able on the industrial loans ; because citizens
escape these burdens under a system of
private industry. Or, in other words, part
of the profits of municipal industry should be
regarded as an insurance against the additional
risks thus thrown on the community. Thus

COST OF PRODUCTION 57

there are several reasons why a mere com-
parison between the interest paid by cities
on their loans and the immediate return to
investors on their investments gives no sure
indication of the possibility of cities gaining
from municipal industries. It may, indeed, be
a fact that the mere prestige attached to the
name of a great city may help it somewhat in
borrowing money, and thus slightly facilitate
its industrial ventures. But this is certainly
but a small gain, and it is one which cannot
now be estimated.

Thus, if it be assumed that the management
will become neither more nor less economical
when industries are transferred to public bodies,
these a priori arguments indicate that a trifling
gain to a city may be made by its municipal
industries. But is it right to make any such
assumptions as to the management? In other
words, can goods be produced as cheaply by
the direct employment of municipal labour as
by private corporations or by contract work?
Something may be said on both sides of this
question ; but general considerations tell, on
the whole, heavily in favour of the belief that
municipal production will be more costly than
private production.

The strongest argument in favour of the belief

H

58 A PRIORI ARGUMENTS

that direct employment is economical relates
to the expenses of superintendence. When
municipalities do work by the direct employ-
ment of labour, only one set of inspectors or
superintendents are required to supervise that
work ; whereas, in the case of work managed
by private proprietors, municipalities may not
be able to trust to the superintendents paid by
the private corporations ; in which case they
must also employ inspectors on their own
account, thus increasing the cost of production.
This is a valid argument in favour of the direct
employment of labour by municipalities when
the cost of superintendence forms a compara-
tively large percentage of the total cost : as, for
example, in the case of small bodies of men
employed in road -making. But as regards
most of the industries usually municipalised
in England, such as the supply of water, gas
and electricity, the cost of municipal inspection
is very small, and in such cases this argument
should carry but little weight.

On the other hand, there are many strong
reasons for believing that production by labour
paid directly by municipalities will be materially
more costly than production by private pro-
prietors. A detailed examination of the diffi-
culties of economic management by public

RATES OF WAGES 59

bodies would, however, occupy too much time,
and all that can here be attempted is to point
out the underlying reasons why these difficulties
are experienced in municipal and not in private
industry. Of these general causes the most
important is the fact that the municipal
employee often has a vote in the district in
which the industry at which he is employed
is situated ; or, in other words, he frequently
has a voice in the selection or the removal of
his own masters, which is, of course, never the
case in ordinary private industry. The muni-
cipal employer has, in fact, an inducement
for wishing to please his employee which the
private employer does not feel. The wages
of municipal workmen in England are, it is
true, seldom raised as a definite and conscious
method of political corruption, but rather as
the result of party bids for popularity with this
portion of the electorate. Whether this be the
true explanation or not, and whether justifiable
or unjustifiable, it is, however, certainly a fact
that municipal workmen are paid more highly
than their brothers in private industry.

Any undue consideration for the feelings of
municipal employees which is rendered probable
when large numbers of voters are employed in
municipal industries, must also militate against

60 A PRIORI ARGUMENTS

the efficiency of the superintendence of these
works. Discipline must have some tendency
to become slack when employers have one eye
on the vote, and cannot fix both firmly on the
work. Moreover, the power of paid officials
both of dismissal and of selection on account
of merit are for the same reason generally
very strictly controlled in municipal industry ;
and this makes it impossible for the heads of
departments to carry on business with the
same efficiency and promptitude as is possible
in private works. Lastly, civic authorities
often pay inadequate salaries to their leading
officials, because by so doing they gain the
applause of the mass of the voters. In respect
to the voting power of employees, the nearest
approach to the condition of affairs obtaining
in municipal industry is to be found in certain
co-operative manufactories. The comparison
is not, however, an encouraging one ; for,
when the employees are given votes for the
election of their own managers, these under-
takings rarely flourish. In one respect the
superintendence may be even more inefficient
in municipal industry than in co-operative
manufactories ; for, when anything like the
spoils system exists, municipal officials are
frequently changed. Thus, even if municipal

THE INCENTIVE OF GAIN 61

workmen were no more highly paid than
private workmen, for all these various reasons,
municipal production by direct employment
would probably be more costly than private
production.

As regards the other underlying considera-
tions which indicate the probability of rela-
tively inefficient management in municipal in-
dustries, they are applicable, not only where
the employees are directly paid by the civic
authorities, but often also to industries owned
by public bodies, but not thus managed. Of
these general causes, the most serious is the
absence of the incentive of personal gain in
municipal industries. The mass of municipal
voters interest themselves but little in the
effect on their pockets of any bad management of
these industries ; whereas shareholders, though
often apparently very apathetic, indicate that
they are alive to the fortunes of the private
works in which they are interested by frequently
selling their shares. Such sales of shares act
as a stimulus to the managers of private
industries which is without an equivalent in
municipal industry. Moreover, the directors,
often being large holders of shares, have also
a personal interest in the economic manage-
ment of the works under their control. Thus

62 A PRIORI ARGUMENTS

the desire for personal gain is a stimulus
which originates with the shareholders, is
reinforced by the directors, and animates the
whole organism of private industry in ways
too numerous to mention.

The last of the general causes of inefficiency
in municipal industries here to be mentioned
is the fact that the system of civic administra-
tion of our cities was created with the view to
the performance of functions very different from
those of manufacturers. Political considerations
are mainly held in view in the nomination of
candidates for local elective bodies, and voters
are but little influenced in giving their votes
by the relative business capacities of these
candidates. In England the aldermen are
added to Town Councils by co- option, and
in this co -option business qualifications are
also but little regarded ; but in private
industries, where directors are also in effect
practically co - opted, the weakness of the
Board of Directors in any special direction
is often seriously considered when filling a
vacancy. For these reasons elected bodies
are likely to contain a smaller proportion of
men of sound business instincts than are
usually found on the managing bodies of
private corporations.

SUMMARY 63

Thus, whether we look to the fact that many
municipal employees are also voters, or to the
absence of the stimulus of personal gain in
municipal industries, or to the political character
of local elective bodies, we see ample reasons
for anticipating that a smaller profit will be
made on a given capital in municipal than
in private industry.

To sum up these a priori arguments, we
have seen that the income of which a city
would become possessed by purchasing any
industry may be divided into two parts. As
to that part which went in the payment of
interest on the capital of the private pro-
prietors, it was seen that cities when they
received it into their treasuries might thus
hope to make a very slight gain, because of
their higher credit. This is, no doubt, a
valid argument in favour of municipal owner-
ship with or without direct employment, but
an argument generally grossly exaggerated,
through misapprehensions of the facts. The
second part, or the remainder of the income
of which cities would become possessed by
the municipalisation of any industry, is that
which covered the expenses of management in
private industry ; and, as it was seen that these
expenses of management would be considerably

64 FINANCIAL CONCLUSIONS

increased by the direct employment of muni-
cipal labour, it follows that this available
income would no longer cover these expenses.
A loss much more considerable than the
possible gain due to high municipal credit
would, therefore, probably be incurred. In
other words, the general conclusion arrived
at by a priori considerations is that a city,
even if no sinking fund had to be provided,
would make a loss by purchasing any industry
and working it by the direct employment of
labour, a loss which would have to be made
good by additional taxation.

FINANCIAL CONCLUSIONS

Comparing this result with the results arrived
at in the previous discussion on municipal
statistics, it will be remembered that there
also a loss was somewhat vaguely indicated
as being not improbable. It may, however,
only be safe to conclude that the results of
a priori reasoning are not refuted by statistics ;
for certainly a very wide margin of doubt
exists as to the gains or losses indicated by
English municipal accounts, mainly because
of the difficulty of estimating the income

INCREASED TAXATION 65

which might be derived from private industry
under proper franchise laws, and of making
allowance for various questions connected with
price and quality. But if such statistical
results are unreliable, ought we not to attach
great weight to the conclusions arrived at by
a priori methods? It must, moreover, be
remembered that English statistics generally
relate to cities where municipal industry only
includes a few municipal monopolies, and
also that these works have not, as a rule,
been constructed by the direct employment
of municipal labour. If, therefore, we wish
to estimate the effect of the wide adoption
of municipal ownership, together with the
direct employment of labour, and also of its
entry into the field of competitive industry,
we have no statistics to guide us, and we
must trust almost wholly to a priori considera-
tions : considerations which point to the con-
clusion that a considerable burden of extra
taxation would be thrown on the inhabitants
of any city in which such experiments were
being made.

But if we confine our attention to the muni-
cipal ownership of the chief municipal mono-
polies, when English statistics do become
relevant, it must be admitted that we have

I

66 FINANCIAL CONCLUSIONS

been marching through a fog in tracking the
truth of municipal finance, and that we may
have lost our way. But it can hardly be
denied that if municipal industry with the
direct employment of labour did not result in
a loss, as above suggested, but was in reality
a source of considerable gain to the cities of
that country, this fact could not possibly have
been hidden by any statistical cloak. This
conclusion is not unimportant ; for if, on other
grounds, it should appear, as regards any
particular industry in any particular place,
that its operation by the direct employment
of municipal labour is distinctly undesirable,
then the financial aspects of this question may
be dismissed without consideration. A re-
examination of the facts certainly could not
disclose the existence of more than a small
gain to English cities on the average ; and this
small gain could not outweigh any serious
disadvantages in other directions which might
result from municipal ownership. On the
other hand, if my conclusions are right, then
the financial results of the direct employment
of labour by municipalities must always tell as
a material weight in the scales against this
method of management.

LECTURE III
MUNICIPAL CORRUPTION

IN my last lecture we were considering the
financial aspects of municipal ownership ; and
the conclusion arrived at from a study of
English statistics was that, as practised in that
country, it is a source of no great gain or loss
on the average to the cities practising it ; whilst
a priori arguments pointed to the conclusion
that it is considerably more likely to be a
source of loss than of gain. Passing on to
the more weighty arguments in this controversy,
the one most frequently discussed in the United
States is probably that connected with muni-
cipal corruption. And here again, in dealing
with this subject, we shall be considering
municipal ownership operated by the direct
employment of municipal labour.

One of the points which here appears to tell
most in favour of municipal ownership is the
belief that it would tend, if extensively adopted,

68 MUNICIPAL CORRUPTION

to purify civic life ; whilst in England many
of the opponents of this movement base their
opposition largely on their conviction that
corruption would thus inevitably be increased.
Here, therefore, is a flat contradiction of
opinions which is well worth investigating.

A sentiment sometimes carries considerable
weight because it has been only vaguely
imagined, and has never been held up in the
cold light of logical reason. Of this type is
the following argument, which, although it is
generally only perceived in a sub - conscious
way, appears to have an illegitimate influence
in the United States. There is no country, so
the argument runs, where municipal ownership
flourishes to a greater extent than in England ;
in England municipalities are free from corrup-
tion : therefore, let us adopt municipal owner-
ship as a cure for corruption. It is true that
there is little open and serious corruption in
English cities ; and it is also true that muni-
cipal ownership has there made vast strides in
recent years. This argument is nevertheless
wholly illogical : which will probably be made
apparent when it is translated into a logical
form. It might, no doubt, be logically urged
that municipal ownership has increased greatly
in England ; that corruption has decreased

CORRUPTION IN ENGLAND 69

concurrently with this increase in municipal
ownership ; and that, consequently, municipal
ownership has not improbably been the remedy
which drove away the disease. This argument
would be logical ; but, unfortunately, the facts
necessary to sustain it are wholly wanting.
With regard to all forms of corruption, but
especially as to the underground action of
respected city thieves, it is always difficult to
ascertain the truth, and only personal impres-
sions derived from reading and conversation
can here be given. In the greater number of
English cities there is nothing worse than a
mild type of corruption ; and even that is very
rare, except in the smaller elected bodies. It
consists in local builders getting jobs which
outsiders would do more cheaply, and perhaps
in officials getting commissions for placing
municipal orders. But there are no signs
whatever of any lessening of these corrupt
practices having taken place simultaneously
with the increase of municipal ownership ; and,
indeed, recent revelations of serious corruption
in certain localities make it appear as if there
were a back-sliding and not an advance in
municipal morality. Thus the coincidence
of the existence in England of fair municipal
purity and a great amount of municipal industry

70 MUNICIPAL CORRUPTION

cannot in any way whatever be made the basis
of an argument in favour of the purifying
effect of municipal ownership.

English municipal purity, such as it is, is, in
fact, due to wholly different causes. The civic
morality of any country is a tree of slow growth,
and to account for its form we must study the
storms of bygone years. But municipal owner-
ship in England is of recent growth, and has
developed with extraordinary rapidity during the
last few decades. It is true that municipal water-
works have existed for a long time, and that
the gas-works of Manchester were placed under
public control as early as 1824 ; but these are the
exceptions and not the normal developments by
which the state of a country should be judged.
The rate of the increase in municipal industry
may be sufficiently illustrated by the one fact that
the debts for public service utilities in English
cities recently increased by 100 per cent, in
fourteen years.1 It is, however, the directly-
paid employees we now mainly have in view ;
and if the increase in their numbers were
known, the figures would probably be even
more startling ; because, as regards the works
for which the debts are raised, the proportion of

1 See Statistical Abstract for the U.K. Cd., 3092. 1889-90
and 1903-4.

OWNERSHIP AS A CURE 71

water-works and harbours, where there are com-
paratively few municipal employees, has been
decreasing in recent years. Thus, if history
teaches us that the current ethical code is but
slowly affected by external causes, it must be
admitted that English municipal morality has
been as yet comparatively little affected by this
movement. On the same grounds, if municipal
ownership should now be rapidly developed in
the United States, and if, in truth, contrary to
my belief, it would have a curative influence, it
must also be admitted that whatever faults now
exist would continue to show themselves for
many years to come.

No doubt many intelligent and thoughtful
persons do believe that municipal ownership
would tend to stop municipal corruption in the
United States. As a stranger I must speak
with caution on this subject, and deal mainly
in generalities. It may, however, fairly be
regretted that those who hold such beliefs do
not, as a rule, state at all clearly how this puri-
fication is to be affected. Municipal ownership
can only produce such beneficial results in
one of two ways : it may either directly tend
to make those taking part in local government
intrinsically purer by planting higher ideals in
their minds, or it may lessen corruption by the

72 MUNICIPAL CORRUPTION

removal of temptation from the path of the
civic authorities. These, the only two possible
beneficial tendencies, must each be examined.

With regard to the first of these possible bene-
ficial influences, it is necessary to enquire why
municipal ownership should have an intrinsi-
cally purifying effect on civic life. Where great
responsibilities are thrown on elected bodies in
English-speaking countries, it is true, no doubt,
that they generally rise to the occasion. But as
regards the larger English cities, the number of
the different duties performed by their Town
Councils is now so great that any new additions
to the list would add but little to the dignity of
their position or to the interest taken by the
public in their work ; and it is difficult to believe
that any elevating influence could result from an
increase in the burden thrown on their backs.
Whether the duties performed by the local
authorities of Boston and New York, for example,
are insufficient to arouse their civic enthusiasm
to the utmost, or whether new responsibilities
would heighten their ideals of civic duty, it is for
the citizens of this country to judge.

But in such matters we must always look to
both sides of the question, and here we must
consider whether municipal ownership may not
have a deteriorating effect as regards the character

DETERIORATING INFLUENCES 73

of elected administrators. In England it has
frequently been suggested that the number of
sound and capable men willing to devote their
time to municipal administration is very limited,
and that the more capable they are, the more
completely will their time, as a rule, be absorbed
in their private affairs. The man from whom
business has retired may, it is true, be pleased at
the thought of managing a municipal industry
where his commercial incapacity will cause him
little personal inconvenience. But men of the
type most needed will frequently be not attracted
to, but rather repelled from civic life by any
increase in the amount of time and energy
demanded from the members of local elected
bodies. Moreover, the establishment of many
municipal industries in any city will render it
less likely that conscientious councillors will be
able to retain their seats should they seek
re-election. Workmen cannot be blamed for
frequently striving for an increase of wages ; for
apathy on that subject would soon result in their
being inadequately rewarded. The inevitable
result of such action on their part is, however,
that employers constantly have thrust on them
the disagreeable task of refusing such demands.
But when these demands for extra wages or
shorter hours are made by the employees in

K

74 MUNICIPAL CORRUPTION

municipal industries, many of whom have votes
in the locality in which the works are situated,
who is it who will be foremost in resisting un-
reasonable appeals — the conscientious councillor,
who merely considers his duty, or the uncon-
scientious councillor who looks mainly to vote-
catching? Any opposition to an increase in
the wages of municipal employees on the part
of a high-minded administrator will not be
forgotten at the next election, and he will receive
no reward for his virtue, unless, indeed, it be held
to be a reward to be relieved from all further
necessity of attending to onerous civic duties.

The voting power of municipal employees
will, moreover, tend to demoralise the electors
as well as the elected. To believe one's self
to be underpaid is a common human weakness,
and demands for an increase of remuneration
are apt to appear merely like demands for
justice. But, in making demands for such
"just" treatment, the municipal workman
must soon discover that his vote is a material
assistance, and he is likely, therefore, to come
to regard the giving of it more and more as
a private privilege and less and less as a
public duty to be exercised in the interests of
the community at large. This is certainly a
downward step in the path leading to corrup-

ELECTORS DEMORALISED 75

tion. For instance, is not the municipal
councillor who uses his vote on the council
for purposes of " graft" likely to be less
severely condemned by the municipal work-
man who looks mainly to his pay when giving
his own vote than by the workman in private
employment who cannot thus attempt to grind
his own axe? When a man on a downward
path ceases to condemn others, he generally
falls more rapidly himself. Thus the municipal
employee is tempted to regard his vote mainly
as an engine to be used in bettering his own
position, though thus to regard it would have
a demoralising effect on himself.

Thus there are opposing advantages and dis-
advantages of municipal ownership as regards
the moral tone of civic life. The municipal-
isation of industries may act as a stimulus ;
but, like other stimulants, it is likely to be
accompanied by harmful after-effects, lowering
the general tone of the body politic. Both
electors and elected will be adversely affected
by the direct employment of municipal labour —
that is, by the payment of voters by the city
authorities ; and these harmful influences would,
in all probability, quite outweigh the beneficial
results arising from the increased responsibility
thrown on the civic authorities.

76 MUNICIPAL CORRUPTION

In reply to the foregoing contentions, which
indicate that municipal ownership is almost
certain to increase municipal corruption, it has,
no doubt, frequently been urged that civil
service reform must be adopted in the United
States simultaneously with any great increase
in municipal ownership. But it is difficult to
grasp the views of those who take up this
position. If they do admit that, without some
reform in the methods of local administration
in the United States, municipal ownership
would increase the dangerous tendencies now
under discussion, surely they ought to hold
that civil service reform should be an accom-
plished fact before municipal ownership is
advocated. But, as a fact, they show no
desire thus to postpone the advent of municipal
ownership ; and it appears, therefore, as if
they would deny its corrupting influence. But
if they do deny this, why should they in any
way link civil service reform and municipal
ownership together as component parts of one
general scheme? Their attitude appears, in
fact, to be illogical. But it may, perhaps, be
assumed that the advocates of municipal owner-
ship combined with civil service reform regard
the main advantage of municipal ownership
to be the consequent removal of temptations

FRANCHISES AND FRAUD 77

from the path of the civic authorities, rather
than its directly purifying influence.

Passing on, therefore, to consider the
temptations which may be escaped by cities
initiating municipal industries, it should be
observed that in England we are quite un-
familiar with the line of reasoning frequently
followed in the United States on this subject.
The argument as here used may, it is believed,
thus be stated. The worst frauds attributed to
civic administrators have been committed in
connection with the franchises granted to
private corporations ; abolish these franchises
by means of the introduction of direct municipal
labour, and this type of fraud must disappear
entirely. Certainly this contention is worthy
of most careful consideration.

In England hardly any, if any, frauds have
arisen in connection with private franchises,
and this argument, in this form at all events,
falls to the ground as regards my country.
But, assuming such troubles to have arisen
elsewhere, it is necessary to enquire to what
extent the temptation leading to corrupt
practices would be diminished by the muni-
cipalisation of an industry, a point which has
not been probed sufficiently deeply in this
controversy. Taking the case of municipal

78 MUNICIPAL CORRUPTION

gas-works, as an example, a very large pro-
portion of the works in England have been
either purchased from private proprietors or
built by contract ; and, where municipal owner-
ship is initiated by either of these methods,
ample opportunity for fraud is thus given ;
forms of corruption which would eventually
result in excessive municipal loans and cor-
respondingly swollen payments for interest
and sinking funds. After the purchase of the
gas-works, the whole of the expenditure on
the production of gas, other than the above-
mentioned payments on account of loans,
would be either on account of the purchase
of materials or for the salaries and wages of
the municipal employees. When works are
both constructed and operated by the direct
employment of labour by municipalities, abso-
lutely the whole of the expenditure may be
divided under these headings of materials and
wages ; for in that case, even as to municipal
loans, they would have been raised solely to
cover these items of expenditure in the original
construction of the works. But as regards the
purchase of materials, fraudulent contracts and
secret commissions would always remain as
dangers to be guarded against. And as regards
wages, here also it must be remembered that

TEMPTATIONS WITH OWNERSHIP 79

the civic authorities would always remain under
the temptation of buying the votes of the
municipal workmen by raising their wages
or shortening their hours of work. Thus in
absolutely no part of the expenditure in
municipal industry, whether it be on loans,
materials or wages, does municipal ownership
afford a method of escape from the dangers of
corruption ; and, as regards the facilities for
bribery, they would be increased. All that
can be said is that the amount of the plunder
obtainable by corrupt civic authorities may
thus, perhaps, be reduced. In other respects
as regards corruption, the municipalisation of
an industry will be but stepping out of the
frying-pan into the fire.

The exact relative amount of possible fraud
under different systems should, no doubt, be
held in view ; but it is even more important
to consider the conditions which are least
likely to tend to make corruption either spread
or obtain a firmer grip on a city. Whether
we look to the conditions affecting the electors
or the elected, the foregoing arguments point
to the conclusion that corruption is more likely
to arise under municipal ownership than with
private industry ; and the following considera-
tions make it seem probable that, where the

8o MUNICIPAL CORRUPTION

disease does exist, direct employment would
increase the difficulty of finding a cure. In
all civilised countries there now exist a large
number of advanced socialists who believe
that under a socialistic system the condition
of all workmen could, in fact, be improved.
They are, moreover, likely to regard municipal
ownership as a stepping-stone by which to
gain their ends, and to believe that to pay
municipal workmen higher than the market
rate of wages would not only not injure other
private workmen, but that it would indeed be
a benefit to them by serving as a sign-post
pointing to the true path of political progress.
Socialistic enthusiasts holding these views
can hardly be blamed for telling municipal
employees that their votes should only be
given at city elections to those candidates who
promise them better terms of employment than
can be obtained in private industry. But
would not such agitators as these afford to
the corrupt politician precisely the opening
he would wish for? If the city authorities
are corrupt ; if they have in their employment
thousands of workmen who, if dismissed from
the service of the city, would sink to a lower
rate of wages ; if there are a number of honest
enthusiasts advocating this superior treatment

DISFRANCHISEMENT 81

of municipal employees ; if, in fact, all these
conditions exist simultaneously, what would
be the chances of a party of purity succeeding
in throwing off the cursed yoke of corruption?
These high-class city thieves might sometimes
get less plunder than they would get if they
had valuable franchises to dispose of; but
they would get that plunder, such as it was,
with more ease and certainty. It is the fear
of what the future may bring in the way of
corruption in England which has led me to
urge my countrymen to pause before plunging
further into this municipal policy. It is for
Americans to consider how far these argu-
ments are applicable to the United States.

It may, however, be urged that where a
disease is feared, we should search for an
antidote before deciding to swerve from our
path for fear of meeting harmful microbes.
Political safeguards against corruption might,
no doubt, be adopted ; and it has, indeed,
frequently been suggested in England by
persons of liberal views that widespread muni-
cipal ownership should be accompanied by the
disfranchisement of all municipal employees as
regards local elections. A better plan, in my
opinion, would be to incorporate them, as it
were, in separate constituencies ; or, in other

L

82 MUNICIPAL CORRUPTION

words, to allow municipal workmen to elect
to all local governing bodies their own repre-
sentatives in proportion to their numbers.
This proposal would, no doubt, present
greater difficulties in the United States than
in England. But if such representatives were
elected, they would come forward as the
avowed advocates of the claims of the muni-
cipal workmen, and their position would be
both honourable and comfortable ; a statement
which can hardly be made with regard to the
position of certain members of the English
House of Commons whose constituencies con-
tain large numbers of voters in the pay of the
Government. If this safeguard were adopted,
and if it were made illegal for municipal
employees to canvas voters not in municipal
employment, then municipal ownership might
be regarded with much less apprehension.
In England it appears, however, as if there
were not the slightest chance of any such
reform being adopted. If this be equally true
here, it must be admitted that the abstract
merits of this proposed safeguard afford, in
fact, no reply whatever to those who urge
that the direct employment of labour by
municipalities would both increase the chances
of corruption arising in the United States, and

MUNICIPAL WAGES 83

make this pestilence cling more firmly than
ever to the diseased city where it now exists.

WAGES IN MUNICIPAL INDUSTRIES

In the foregoing discussion on corruption
it was asserted that not only do municipal
workmen receive better pay than private work-
men, but that many socialists hold that it is
right that they should thus be treated. If any
plea could be sustained for the payment to
the directly-employed municipal workman of a
wage above the market rate of wages, then
the fact that they are thus paid could no doubt
be counted as a weight in the scales telling in
favour of municipal ownership. It will, how-
ever, be seen that these socialistic arguments
crumble to pieces on close examination.

That municipal employees are better off than
workmen similarly employed in private industry
is, I believe, an indisputable fact, which would
not be denied by the advocates of municipal
industry in England. When a street railway,
for example, has been recently municipalised,
the town councillors concerned frequently
boast that they have altered the terms of
employment in favour of their newly-acquired

84 MUNICIPAL WAGES

employees, either by increasing their pay, or by
shortening their hours of labour. A diminu-
tion in the length of the day's work must
normally be accompanied by an increase in the
number of hands employed, unless, indeed, the
hours were uneconomically long before the
reduction. Although evidence on this point
is not altogether wanting, it is impossible to
give reliable statistics as to the relative number
of hands employed in municipal and private
industry, because municipal industry in England
has never been subject to the searching enquiry
demanded by its opponents. As a solitary
example, it may perhaps be noted that in an
interesting account of the municipalisation of
bakeries in Sicily, Professor . Tenerelli states
that the number of hands employed rose from
404 to 557 in the first fifteen months of public
management. But, whether more hands are
employed or not, a great deal of evidence is
forthcoming to show that the rate of daily
wages is higher in municipal than in private
industry.

In passing on to consider whether this is as
it should be or not, the analogy of a landlord
and tenant may serve us once again. If an
eccentric landlord, when he received the rent
from the farmer farming his land, were to hand

EXCEPTIONAL TREATMENT 85

it over to the civic authorities as a gift to be
used so as to reduce taxation, no one could
possibly urge that the workmen employed on
his land would thus be aggrieved ; for they
would be thought to be utterly unreasonable
if they complained that the money was used
for the benefit of the public generally, instead
of being handed over to them for their sole use.
But if the landlord were to farm his land him-
self, and were in like manner to devote the
profits to the benefit of the public, could this
change in his methods affect the rights of his
employees? Obviously not. But a landlord
farming his own land instead of leasing it to a
farmer is closely analogous to a city operating
its own street railways, for example, instead
of leasing them out for operation to a private
corporation. When Birmingham thus leased
out its street railways, no one ever suggested
that the rent thus obtained by its citizens should
be reduced in order to raise the pay of the
private employees above the market level.
And a rational plea for exceptional treatment
can no more be established on the ground that
a municipality, instead of leasing out its street
railways, operates them itself, than on the
ground that a landlord farms his own land
instead of letting it to a farmer. A municipality

86 MUNICIPAL WAGES

is a landlord, and its industries are like its
farms which it can farm itself or not as it thinks
fit, without reference to its employees.

It may, perhaps, be urged that, for a given
output and as compared with private industry,
municipal industry is less costly in all items
except labour, and therefore that the employees
may be paid more highly without injuring any
one. It has, however, already been indicated
in the foregoing financial discussion that this
contention cannot be sustained by fact or
argument. It may, perhaps, also be urged that
although it is true that additional funds must
be obtained, yet the necessary taxation would
fall more heavily on the rich than the poor,
and, consequently, that the municipal employees
would on the whole be benefited. The true
incidence of the burden of taxation will be
discussed in the last lecture ; and here it is
sufficient to remark that it is not denied that
municipal employees are benefited by their
exceptional treatment. All that is asserted is
that additional taxation must be imposed where
municipal industry exists, and that it does
injure the private workman somewhat : the
greater the amount of municipal ownership,
the heavier being the burden thrown upon him.
The additional sum required may no doubt be

INCREASED TAXATION 87

raised in various ways. To obtain it, it may
be that the price of gas, if that be the muni-
cipal product in question, would be raised on
municipalisation ; and in that case it would
be on the consumer of gas that the additional
burden would fall, and the impost would be
like a tax on gas. But if gas is to be taxed,
why should not the proceeds of the tax go to
benefit the whole community? Surely it must
be wrong to levy any sum solely for the
advantage of one class, a class which is
selected at the best arbitrarily, and at the worst
on political grounds. Again, it may be that
the impost due to the increase of the labour
bill on municipalisation falls on the tax-payer,
who either has to make up for any deficit on
the gas-works, or who does not receive in
relief of taxation the profits he might fairly
expect to get from his municipal investment.
The impost due to an increase in the municipal
wages bill must, in fact, fall on either consumers
or tax-payers, and in neither case is it justifiable
to make them suffer for the sake of placing a
fraction of the community in an exceptionally
favourable position.

As another justification of the exceptional treat-
ment of municipal workmen, it has been said
that we should not look at questions connected

88 MUNICIPAL WAGES

with wages solely from the narrowest economic
standpoint. In all matters with regard to which
workmen are careless as to their own true
interest, for example as to their health and safety,
merely to strive at producing goods as cheaply
as possible no doubt does not necessarily point
to the right course of action. Although this is
true enough, no great weight can be attached to
the arguments founded on such statements. It
is, indeed, possible that the cost of production in
municipal industry ought to be higher than the
cost in ill-regulated private industry ; for this is
not necessarily inconsistent with the true cost to
the nation being less, more possibly being saved
indirectly to the community in matters of health,
etc., than is lost by the extra cost of production.
But where private industry is well regulated, all
the precautions with regard to health and safety,
which municipalities might reasonably undertake
voluntarily, should as far as possible be enforced
on all private proprietors ; and if that were done,
municipal industry would present hardly any
advantages in this respect over private industry.
The true path of reform thus indicated is there-
fore the enforcement of proper regulations in all
industries, and not the promotion of voluntary
efforts on the part of civic authorities.

Again, it is often urged that an endeavour

AS AN EXAMPLE 89

should be made by municipalities to set a good
example to other employers of labour, and that
exceptional advantages may be granted to muni-
cipal workmen — not for their own sakes, but for
the sake of workmen in private employment.
The validity of this argument obviously depends
on whether private workmen are in truth bene-
fited by the advantages showered on municipal
workmen. Those in doubt on this point should
enquire of any keen manufacturer, in the first
place, whether he knows the rate of wages paid
by city authorities in his neighbourhood, and in
the second place, if he is informed on this point,
whether these civic rates of wages in any way
affect the terms he offers his own employees. A
smile will probably be the answer. It is only
because municipal ownership is now almost
entirely confined to industries tending to become
monopolies that civic authorities can escape from
the control of the economic forces dominant in
competitive industries, and can both make a
profit and give their employees remunera-
tion above the market rate. Where wages are
materially influenced by the philanthropic views
of an employer in ordinary industry, ruin is
likely to be the result ; and examples set by
the municipal owners of monopolies appear to
have no influence on the wages in competitive

M

90 MUNICIPAL WAGES

industries. The so-called good example as
set by municipalities is therefore only possible
because of the municipalisation of monopolies ; it
is almost without any external influence ; and it
affords a very feeble justification for the creation
of a specially privileged class of workmen.

Thus, on the one hand, little can be brought
forward to justify municipal employees being
placed in a more favourable position than their
fellows in private industry ; whilst, on the other
hand, there appears to be no excuse for imposing
an unnecessary burden on the private workman.
Moreover, this practice of favouring the muni-
cipal employee is also positively harmful for
reasons which may already have been suggested
by this discussion on corruption. To dismiss
workmen from municipal employment not only
throws them temporarily out of work, but also
generally permanently reduces their wages or
increases their hours of labour ; and the more
power a city has over its employees, the easier
is it for corrupt authorities to influence their
votes. That municipal workmen do receive
more favourable treatment than private work-
men is an indisputable fact : a fact which,
therefore, on the whole, tells against, and not
in favour of the direct employment of labour
by municipalities.

DIRECT EMPLOYMENT 91

THE CASE FOR DIRECT EMPLOY-
MENT

All the arguments thus far considered have
resulted in strengthening the case against the
direct employment of labour by municipalities ;
and the legitimate arguments in its favour
must now be discussed. The two main argu-
ments are, in the first place, that municipalities,
by actually managing industries themselves,
can regulate the prices of the goods sold to
the public more efficiently than under any
method of industry in which private proprietors
participate ; and, in the second place, that
civic authorities, being less influenced by the
desire to make profits than private proprietors,
will, as the representatives of the people, pay
more attention to all questions connected with
morals, health or comfort.

With regard to both these pleas, it is to be
noted that industry may, broadly speaking, be
divided into two stages, namely, the work of
initiation and construction, and the work of
management and production. It will be seen
that the arguments in favour of direct employ-
ment of labour by municipalities apply with

92 DIRECT EMPLOYMENT

much greater force in the productive than in
the constructive stage of industry.

As to the first of the above-mentioned argu-
ments in favour of direct employment, namely,
the facility which municipalities undoubtedly
possess when they manage an industry directly
of regulating the prices of goods, the other
aspect of this question has already been dis-
cussed in my first lecture, where the best method
of controlling prices in private industry was
considered. There it was seen that, where
competition is free and effective, prices are
automatically regulated, and there is no need
in this respect for governmental interference.
But the more an industry tends to become a
monopoly, the more necessary is it for the
State to prevent private proprietors from reap-
ing undue or illegitimate profits, and the
greater, consequently, are the advantages of
municipal ownership. But a monopoly can
always be avoided in the constructive stage of
industry ; because it can always be arranged
that there shall be competition between archi-
tects and contractors for the design and
building of the works, and between different
private proprietors when granting the franchises
giving the necessary rights to embark on the
industry in question. Water supply in towns

REGULATION OF PRICES 93

is the most complete monopoly which exists ;
but the building of water-works can always be
let out to tender. There is, therefore, no
reason on account of an industry being a
monopoly for ever resorting to the direct
employment of labour by municipalities in the
constructive stage of industry.

In the productive stage, no doubt, many
industries inevitably tend to become monopolies;
and, where this is the case, the regulation of
prices can most easily be effected by civic
authorities if they undertake the direct manage-
ment of the business themselves. In the case
of water, it is often very difficult for a city to
estimate what will be the actual cost of the
supply ; because the experience of other cities,
and, indeed, the previous experience of the
same city, affords but an uncertain guide.
Hence the control of water supplies in private
hands may present considerable difficulties,
and the necessity of regulating prices may
make the municipal management of water-
works very desirable. But, as regards other
industries, if the factors effecting the supply
of the product are unlikely to change quickly,
and if its quality and quantity are easily
measured — conditions which are fulfilled in the
case of gas, electricity, and street railways —

94 DIRECT EMPLOYMENT

then there is generally but little difficulty in
estimating the cost of production for some
time to come ; and in these circumstances, if
short franchises with sliding scales are granted,
it ought to be possible to enforce a fair
scale of prices on private proprietors. In
some cases private corporations would probably
obtain undue profits, and the average prices
in private industry would, therefore, probably
be somewhat higher on this account than the
scale of prices which would obtain if the
industries in question were municipalised,
and if the civic management were equally
economical. But municipal management will
not be as economical as private management ;
and any small gain which cities may on the
average thus reap by the more efficient con-
trol of selling prices will generally be more
than counterbalanced by less efficient manage-
ment. Thus this argument in favour of the
municipal management of public utilities,
other than water supply, is generally not a
strong one ; though it does point clearly to
the serious disadvantages of granting long-
period franchises to the private proprietors of
municipal monopolies.

The second argument in favour of direct
employment, namely, that dependent on the

HEALTH AND MORALS 95

temptation under which private proprietors lie
of neglecting questions other than those affect-
ing their profits, is of more importance ; for,
undoubtedly, where considerations connected
with health and morals point in a different
direction to mere financial considerations, the
former should generally prevail. As regards
the constructive stage of industry, it is
obvious that plans and designs must in all
cases be made before building is commenced ;
and opportunities of considering these designs,
and, if necessary, of altering them, might
always be afforded to the civic authorities
whether the work was eventually to be per-
formed by private contractors or by the direct
employment of municipal labour. As to the
execution of work on approved designs, in the
case of the building of sewers, where 'the work
is quickly covered up and where subsequent
inspection is difficult, a strong case, though
perhaps not a conclusive one, can be made
out in favour of direct employment. But as
regards building operations generally, where
subsequent inspection is not very difficult, we
have to weigh the fact that the contractor is
likely to be an expert in the construction
of works of a certain type, against the fact
that he is tempted to scamp his work in

96 DIRECT EMPLOYMENT

order to swell his profits. Experience appears
to indicate that contract work executed under
proper supervision is sufficiently good to make
it doubtful whether work performed by direct
employment is better or worse in quality ; and
as regards this argument also there appears,
therefore, to be no case made out for direct
employment in the constructive stage of
ordinary industries.

In the productive stage of industry, the
fact that civic authorities are not too closely
tied to questions affecting profits does, no
doubt, tell in favour of municipal ownership
with direct employment in the case of many
public service utilities which, though the term
industry seems hardly applicable, are at times
undertaken by private proprietors for the sake
of making a profit. It may be right, for
example, for a city to manage public baths,
in order to promote health and cleanliness,
even though a loss is thus incurred ; and
other services may, perhaps, similarly be
justified on the ground that, if a community
does not appreciate a good at its true value,
civic authorities can stimulate its sale by
selling it below cost price. In the case of
harbours, again, their municipalisation may be
advisable because the whole of the inhabitants

SERVICES TO BE MUNICIPALISED 97

of the cities concerned may be benefited by
their maintenance, whilst the levy of a tax
may be the only method of making them
all pay for the advantages thus received. In
weighing the relative merits of public and
private slaughter-houses, humanitarian and
sanitary considerations may point to the
necessity for greater expenditure than private
proprietors could easily be made to incur. It
is, no doubt, possible that all these services
might be left in the hands of private pro-
prietors if bounties were awarded to compensate
them for probable losses ; but bounties are
always open to serious objections. Lastly,
where a service is of vital importance to the
community, it may be undesirable to lose
complete control over it even during the
period of a short lease or franchise. Although,
unfortunately, perpetual franchises have been
granted to the proprietors of water -works in
England, the following example indicates that
the municipalisation of water supplies would
be preferable to private proprietorship even if
the franchise laws were reformed. There are
reasons, though not conclusive reasons, for
believing that in a certain English city the
water supply may at any moment become
contaminated with the germs of enteric fever

N

98 DIRECT EMPLOYMENT

through no fault of the private proprietors
of the water -works. In these circumstances
it is extremely difficult to force the private
corporation to take costly precautions against
the threatened danger — precautions which,
no doubt, the municipality would take if it
owned the works. Thus it appears that, for
somewhat similar reasons, the municipalisation
of water-works and of a number of other public
utilities should receive strong support. But
none of the foregoing arguments apply with
any great force in favour of the municipal
management of such services as the supply
of gas, electricity, or street railways ; that is
to say, to those industries where a loss ought
not to be incurred by the municipalities
managing them, where there are alternative
methods of supplying the wants of the public,
and where questions connected with health,
morals, and comfort are not very seriously
involved.

The main advantages and disadvantages of
direct employment having now been discussed,
it may be as well to recall briefly the way in
which the whole question of municipal owner-
ship is being approached. The different
functions which a city may perform have been
compared to those of an administrative body,

DIRECT EMPLOYMENT 99

a landlord, and a manufacturer ; and the
question under consideration is in what cases
should a municipality perform all these three
functions? If the city authorities only act as
an administrative body, all industries must
remain in private hands ; if they only act in
the dual capacity of an administrative body
and of a landlord, then they must lease out
such industries as they own to private pro-
prietors for management ; whilst, if they
undertake all these three functions, they may
themselves manage the industries they own
by the direct employment of labour. Thus
there are three possible methods of operating
industries which have to be compared ; and,
in order to facilitate this comparison, it
seemed best to begin by comparing the last
two methods ; that is to say, assuming a city
to be the owner of an industry, the first
question at issue is whether that industry
should be leased out to private proprietors
for management, or whether it should be oper-
ated by the direct employment of labour by the
municipality itself. It is, in truth, difficult
to separate this question from the broader
question of municipal ownership ; but it may,
nevertheless, be convenient first to sum up the
foregoing arguments which are all certainly

ioo DIRECT EMPLOYMENT

relevant to the direct employment of labour
by municipalities.

Taking first the case against direct employ-
ment, the strongest argument brought forward
by its opponents is that a large number of
voters may thus be brought on to the pay
lists of municipalities, and that this would
inevitably increase the danger of civic corrup-
tion. Then again, as to financial considera-
tions, a priori arguments pointed clearly to
the probability that the normal result of
direct employment would be, not necessarily
a deficit, but a loss to the city practising it ;
whilst English statistics, which, of course,
should not be taken as a guide to countries
proceeding further along the path of muni-
cipal industry than England has already trod,
did not refute and may even be claimed to
afford a doubtful confirmation of this con-
clusion.

Thus the probability of greater corruption
and of increased cost of production afford the
strongest arguments against direct employ-
ment. On the other hand, it has been urged
by the advocates of this system that muni-
cipal workmen are better paid than private
workmen ; but on examination this argument
in favour of direct employment was found to

SUMMARY 101

be invalid. It is, moreover, indisputable that
civic authorities obtain a complete control
over the prices of goods they produce if they
manage the works themselves ; and that some
regulation of prices is necessary in the case
of an industry tending to become a monopoly.
This, however, affords no argument in favour
of municipal ownership in the case of industries
where competition is free and effective ; and
when indirect competition does exist, as in
nearly all industries, and when the prices
charged by private proprietors can be fairly
well regulated under a system of short-period
franchises, the advantages which arise from
direct employment on account of the facility
for regulating prices are small. Lastly, it
is urged that private proprietors, since they
must always be seeking for profits, will pay
little attention to questions of morals, health, or
comfort. But here again it was seen that little
weight should be attached to this argument,
except in the productive stage of water -works
and of a number of other public utilities hardly
to be called industries, such as public baths,
wash - houses, cemeteries, slaughter - houses,
markets, and perhaps harbours.

Opinions will no doubt differ widely as to
the weight to be attached to these opposing

102 DIRECT EMPLOYMENT

arguments ; and although my present endeavour
is to state arguments rather than conclusions, my
own views may, perhaps, be stated very briefly.
Direct employment should, in my opinion, always
be shunned in industry proper, except in the
following circumstances : In the constructive
stage of an industry it may, perhaps, be advan-
tageous in the case of the building of sewers, and
in a few other cases where the work of inspection
is exceptionally costly and difficult. In the pro-
ductive stage of industry direct employment is
only beneficial where three conditions are ful-
filled : namely, where there is a strong tendency
for the industry to become a monopoly, where it
is of great importance to the community — or, in
other words, where a loss might reasonably be
incurred by the municipality managing it — and
where, in the near future, changes in the factors
of supply are not improbable against which
adequate provisions cannot be inserted in fran-
chises or leases. As regards industries owned
by cities and not fulfilling these conditions,
including gas-works, electric lighting works,
and street railways, it is, on the whole, prefer-
able that they should be leased out for short
periods to private proprietors for management.
This conclusion, which is on the whole
strongly adverse to direct employment, would

CONCLUSIONS 103

if accepted practically close this whole contro-
versy in England ; because the strength of the
movement in favour of municipal ownership lies
in the desire for direct employment. Direct
employment being barred, it would be easy to
deal with all the outstanding questions with
regard to ownership ; and it is for this reason
that they have been relegated to a position of
secondary importance. They must, however,
be discussed briefly, and in my next lecture
industries owned by municipalities and leased
out to private proprietors will be contrasted with
industries both owned and managed privately.

It must, however, be remembered both that the
main object of thus dividing the subject was to
emphasise the fact that there are two not readily
separable questions at issue, and that the result
of the comparison next to be made will not be
without effect on the question of the direct
employment of labour by municipalities. The
arguments which remain to be considered are,
it is true, relevant to municipal ownership gener-
ally; but as direct employment is not compatible
with private ownership, to whatever extent these
arguments now to be discussed should turn in
favour of private ownership, to that extent there
will be an additional weight to be placed in the
scales as against direct employment.

LECTURE IV
MUNICIPAL OWNERSHIP

IN my last lecture the direct employment of
labour by municipalities was considered, and
the conclusion arrived at was that, as regards
the points thus far discussed, civic authorities
should, as a general rule, avoid it as far as
possible. No doubt in the exceptional cases
where it is the best system to adopt, there
municipal ownership becomes a necessity ; for
municipalities would practically never undertake
the direct management of labour at works they
did not own. But, where direct employment is
rejected, it still remains to be considered what
are the advantages and disadvantages of muni-
cipal ownership : that is, of municipal industry
without direct employment. Little time will,
however, be devoted to this discussion, both
because it is a question of less practical im-
portance at present than that of direct employ-
ment, and also because some of the points yet
to be considered bring us into close contact with
the great controversy between individualism and
104

METHODS OF INITIATION 105

socialism — a controversy extending far beyond
the scope of these lectures.

Municipal ownership without direct employ-
ment may be established in the following ways.
A city may initiate an industry ; that is to say,
having decided, for example, that public electric
lighting works shall be built in a certain district,
and having raised the necessary funds and
bought the land, the civic authorities may leave
the construction of the works entirely in the
hands of a contractor. In this case municipal
ownership occurs in the constructive stage of in-
dustry, but without direct employment. Again,
civic authorities who have either initiated in-
dustries in the foregoing manner, or who have
bought them as going concerns, may lease them
out for operation to private proprietors. Here
there is municipal ownership in the productive
stage of industry. It may no doubt be said that
municipal ownership of this description is not
often met with, as in reality it is generally
accompanied by direct employment. This is
true ; but it merely tends to confirm the belief
that the subject now under discussion is of less
importance than that of direct employment.

When a municipality raises money in order to
establish or acquire an industry, it is, in fact,
speculating with the wealth of the tax-payers ;

o

106 MUNICIPAL OWNERSHIP

for either their property must be pledged as a
security for the loan, or the money must be raised
by taxation. No individualist would consider
such speculation as quite unobjectionable ; and
if the industry were bought, many socialists
would also protest on the ground that the price
paid was excessive. No doubt, in the case of
an industry which tends to become a monopoly,
the greater that tendency, the less is the
risk involved in its municipalisation. But risk
cannot be wholly avoided ; for the demand for
the goods supplied may decrease ; and where
works are bought at their market value, the price
paid always introduces a speculative element.
In fact, in all cases some risk, great or small,
is thrown on a city by municipal ownership.
On the other hand, when a franchise has been
granted to a private corporation to permit it to
operate any industry, no risk whatever is thus
thrown on the citizens as such ; and private
ownership, therefore, always has in this respect
an advantage over municipal ownership.

Against the foregoing advantage, namely,
that dependent on the absence of risk, various
alleged disadvantages of private ownership have
to be weighed in the scales. As to the financial
questions involved, these have already been
discussed in connection with direct employment,

THE CASE FOR OWNERSHIP 107

and the result was that on the whole the balance
of argument appeared to turn decidedly against
municipal ownership. Again, it has frequently
been urged that the interests of the public are
more efficiently safeguarded when municipalities
own industries, whether they operate them or
not, than with private ownership. But, where
competition is free and effective, it has been
seen that the public, as consumers or tax-payers,
require no safeguards, and this argument in
favour of municipal ownership falls to the
ground in these circumstances. It is true that
when there is a tendency for an industry to
become a monopoly from any cause whatever,
then that industry must be more or less con-
trolled by the State. But here again it must be
remembered that, as to the objects sought to be
obtained by that control, namely, the safeguard-
ing of the interests of the consumer and the tax-
payer, they are exactly the same whether a
municipality does or does not own the works in
question ; and also that any safeguards, which
in the case of municipal ownership should be
inserted in the leases granted by municipalities
to private corporations, can equally well, in the
case of private ownership, be inserted in the
short -period franchises granted to private pro-
prietors. In fact, it has not yet been sufficiently

io8 MUNICIPAL OWNERSHIP

recognised that, if a franchise is only granted for
a limited period, the State may be said in a sense
to retain the true ownership of the industry,
although it is nominally a case of private owner-
ship ; and that where the ownership is thus in
effect, though not nominally, retained by the
State, actual municipal ownership presents little
advantage as regards the safeguarding of the
interests of the public.

Where a corporation has, however, been
granted a franchise, giving it the right to
manage a monopoly in perpetuity, then the
conditions are, no doubt, such as to make it
improbable that the interests of the public are
being properly safeguarded, and some reform
is much to be desired. There is no inherent
objection or difficulty in the State permitting
municipalities in such cases to convert these per-
petual franchises into short-period franchises, the
private corporations being duly compensated ;
and this seems to me to be the wisest reform to
be adopted in these circumstances. But if this
suggestion is rejected as impracticable, then it
appears that the only way for the civic authori-
ties to safeguard the public without resorting to
direct employment is to buy out the owners of
perpetual franchises and to lease out the works
for short periods to private corporations.

THE NATIONAL DIVIDEND 109

Thus far it appears that the case for municipal
ownership without direct employment is strong
only where, in the case of monopolies, perpetual
franchises have already been granted. But, as
regards street railways, since municipalities
must repair the roadways, there is also much to
be said in favour of the control of the whole
surface of the street, whether paved with iron or
not, remaining in the hands of the civic authori-
ties. With this and a few similar exceptions,
the risks involved in municipal ownership make
private proprietorship with short franchises the
preferable system.

The foregoing arguments deal with the
more immediate effects of municipal owner-
ship ; but it may well be that the ultimate and
indirect consequences are of greater importance.
There remain, in fact, to be considered other
objections to municipal ownership which are
not likely to be seriously felt as long as the
bulk of the industry of a country remains in
private hands. All capital, however raised,
represents the savings of a community ; whilst
goods produced with the aid of this capital
form the stream out of which payment is made
for all work and for all saving ; and it is
urged that this stream, or this national divi-
dend, as it is called, is likely to be diminished

no MUNICIPAL OWNERSHIP

by the municipalisation of industries, to the
obvious detriment of all classes. In consider-
ing whether civic authorities will, on an
average, invest the national capital so as to
produce more or less goods than if the same
sum were invested by a number of private
individuals or corporations, each using an
independent judgment, we must regard the
nation as a whole, and we must not consider
results in separate localities. When the nation
is thus regarded, it becomes evident that if
municipalities confine themselves to the pur-
chase of going concerns, or to the initiation
of such services as would, in any case, cer-
tainly be established by private proprietors — if,
in fact, they do not by their action directly
alter the investment of the national capital,
then there is no prima facie reason why muni-
cipalisation in these circumstances should
affect the productivity of the national capital.

It is in cases where cities step beyond these
limits that harmful results are more likely to
arise as regards the investment of capital.
Town councillors must regard themselves as
trustees for money raised by taxation from
citizens, and this may make them decline to
extend their systems of street railways, for
example, into districts where losses might

THE NATIONAL DIVIDEND in

possibly be incurred, even though such ex-
tensions would be legitimate speculations for
private and willing subscribers : a caution
which may make the average receipts per mile
of municipal street railways higher than that
of private street railways. On the other hand,
it has already been pointed out in connec-
tion with financial considerations that various
circumstances, including the absence of that
admirable automatic regulator of private invest-
ments, the fear of personal losses, tend to
make municipalities invest the funds at their
disposal in a rash and unremunerative manner.
Municipal authorities are, in fact, likely to be
sometimes cautious where they should be pro-
gressive, and sometimes progressive where
they should be cautious ; and, if they enter
deeply into industrial enterprises, there is
likely to be a shrinkage in the national
dividend, and a lowering of the real reward
to all classes for their work or saving. In
short, municipal ownership in the constructive
stage of industry is likely to be very harmful.
Amongst the objections to municipal owner-
ship, the consequent increase of municipal
indebtedness is frequently brought forward in
England. Putting aside as being out of the
question the possibility of property being

U2 MUNICIPAL OWNERSHIP

taken by the State without any compensation
being given to the expropriated proprietors,
the establishment of all municipal industries
necessitates the raising of money by loans or
taxation, the amount required being generally
greater where industries are to be operated by
the direct employment of labour by the muni-
cipalities than if to be leased to private
corporations. Now the amount borrowed for
such purposes, so it is roundly declared by
the opponents of municipal ownership, is so
great that the financial condition of many
English cities is distinctly alarming. In reply
to these pessimistic warnings, it is urged that
municipal debts, even if they are unduly
large, have been raised for many other pur-
poses besides industrial enterprises ; that they
are being gradually paid off ; that as to the
portion of the debt which has been incurred
in the purchase of industrial works, a not
inconsiderable fraction has already been liqui-
dated, whilst the properties purchased have
increased in value since the purchases ; and
that, consequently, the industrial assets of
English cities more than cover their corre-
sponding liabilities. It is true, it may be
added, that some new invention may super-
sede gas, for example, and that, consequently,

MUNICIPAL DEBTS 113

most of the capital sunk in gas-works may
possibly become useless. But, until this catas-
trophe becomes imminent, gas-works will
assuredly be found in all cities either under
public or private ownership, and consequently,
if the community be regarded as a whole, it
appears that the loss of capital due to these
works becoming obsolete would be no more
and no less injurious whatever method of
ownership be adopted. It follows, so the
advocates of municipal ownership conclude,
that the municipalisation of the principal
municipal monopolies is not an additional
source of danger.

This reply to those who advocate the avoid-
ance of municipal ownership because of the
risks involved does, it appears to me, con-
siderably lessen the force of their arguments,
at all events in the crude form in which they
are generally presented. That they are crude
is mainly due to the omission to take sufficient
account of the fact that the capital of muni-
cipal and private industries is raised on wholly
different terms. When a city raises a loan
in order to buy private electrical works, for
example, it in effect forces all the citizens
within the taxable area to take part in a
speculation whether they wish to or not,

p

H4 MUNICIPAL OWNERSHIP

whether they intend to use electricity them-
selves or not, and whether they believe it a
sound investment or not. The civic authorities,
in fact, acquire the power to force each tax-
payer to borrow, for this purpose, on the
security of his real property ; and not only to
incur this liability to an extent proportionate
to his own holding, but also to go security
for the money raised on the real estate of all
his neighbours. This statement probably needs
explanation, and, in explaining it, it will be
best for me to deal with England only on
account of my imperfect knowledge of American
legislation.

If the taxation in any city is increasing,
owners of houses and manufactories may try
to better their condition by migrating to other
localities. An important firm has recently
announced its intention of quitting the banks
of the Thames in order to re-establish its works
in some less heavily-taxed district ; and other
corporations are considering the advisability of
taking such a step. The possibility of a con-
siderable migration resulting from the burden
of local taxation is not, therefore, merely a bad
dream, but is a condition of things which may
actually have to be faced. When houses are
left empty, little or no local taxation is levied

MUNICIPAL DEBTS 115

on the owners, and, when many houses are
thrown on the market, there is, as a rule, a
fall in their value, and consequently in the
local taxation levied thereon. But a diminu-
tion in the revenue cannot be tolerated, at all
events in so far as it is needed for the charges
for sinking funds and for interest on municipal
industrial debts ; and this loss of income must
be made good somehow. In fact, the remaining
tax-payers must take up the burden cast off by
the fugitives. If a city with a large industrial
municipal debt should begin to decline in
prosperity, as may well occur in mining
districts, with the departure of each firm or
citizen, the taxation levied on the remainder
must necessarily be increased. With every
such increase in taxation the temptation to fly
to more favoured regions would increase also ;
and thus we have a circle of causes tending
to make the city go from bad to worse —
slowly at first, then quicker and quicker,
and finally full gallop straight to municipal
bankruptcy.

It is true that such a catastrophe is not on
record, and it is always difficult to estimate
the importance which should be attached to
hypothetical dangers. Whether the picture
just drawn is fanciful or not, time alone will

u6 MUNICIPAL OWNERSHIP

disclose ; but a possibility so serious ought to
count for something in this controversy.

Another objection, and one of the very
strongest that can be urged against municipal
ownership, more especially if accompanied by
direct employment, is that a bureaucratic system
always tends to destroy initiative and to create
stagnation. This want of initiative in govern-
ment services is due both to its machinery
being larger and more unwieldy than that of
private industry, and to the absence of the
stimulus of personal gain. This subject has
also been dealt with in connection with finance ;
but the resulting evils are such as would not
always show themselves quickly in municipal
profit and loss accounts. Civic authorities
may faithfully copy private firms in all their
business arrangements ; and, although they
may initiate nothing, yet their industrial balance
sheets may compare not unfavourably with those
of the private corporations thus copied. But,
if all industry were in municipal hands, this
want of initiative would produce disastrous
results : for then there would be no one to
copy. In deciding what businesses they will
undertake and how they will undertake them,
in no country in the world are private corpora-
tions given a freer hand than in the United

LOSS OF INITIATIVE 117

States ; and there is no country which owes
more to the inventive genius of its citizens.
Those who doubt whether these facts have any
connection with each other will do well to
enquire what new inventions or processes first
made their appearance in State workshops or
offices. Initiative of all kinds is inadequately
rewarded by democratic governments, and the
spirit of progress amongst individuals is, more-
over, of slow growth. The establishment of a
bureaucratic system in any group of industries
in this country would inevitably lead to the
slow decay of the inventive spirit as regards
those industries, with a corresponding loss to
the nation.

There is again another reason for anticipating
that private industry will be more progressive
than municipal industry, and that is that there
is an increase in the tendency for industries to
become monopolies when they have been muni-
cipalised. It is true that when an industry is
an absolute monopoly, it cannot become more
monopolistic, and no harm can be done by a
step producing such a general tendency. No
industry is, however, wholly free from indirect
competition, except domestic water supply ; and
the tendency to become a monopoly in all other
industries can therefore be increased. It is also

ii8 MUNICIPAL OWNERSHIP

true that the danger is one to be feared in the
future rather than one to be demonstrated as
being serious at present. But the advocates of
municipal industry in England have distinctly
declared that its freedom from private com-
petition is part of their policy ; municipal
authorities are in a better position in many
ways than private corporations to protect their
industries from competition ; and it is certain
that industries will generally tend to become
closer monopolies in public than in private
hands.

The desire of civic authorities to avoid
competition first shows its effects in private
competitors being kept off the as yet unoccu-
pied field. As already mentioned, this result
was at one time to a large extent obtained in
England in the electric industry by the offer of
prohibitively rigid terms to private speculators ;
whilst, in cases where private corporations were
willing to come forward, municipalities have
often been able to prevent the grant of the
necessary franchises. These are the reasons
why harmful consequences due to a limitation
of competition are likely to be felt in the con-
structive stage of industry, when, as has been
seen, a monopoly need never be tolerated.
The desire to check competition, direct and

MUNICIPAL PROTECTION 119

indirect, in the productive stage, that is when
civic authorities have undertaken the manage-
ment of any industry, has thus far produced
far less serious results. Municipalities have, no
doubt, established both gas-works and electric
lighting works, in which case true competition
between these industries can hardly be said to
exist. Then, again, local authorities have been
known to refuse licences to motor omnibuses on
the alleged ground that they would be noisy.
Whether in such cases the desire to avoid com-
petition was altogether without influence on
the actions of the local authorities may be
doubted ; for the human mind being such a
strange machine, it is quite possible that those
in power may have been unaware of all their
underlying motives. Few men can play well
the parts of judge and aggrieved party at the
same time. These checks on competition in
the productive stage of industry, though they
are not serious, nevertheless serve to indicate
the probable trend of events in the future.

The tendency for industries in municipal
hands to become monopolies has been spoken
of as a danger ; but if we should pass
on to discuss this danger in detail, we should
find ourselves entering on the great con-
troversy between individualism and socialism.

120 MUNICIPAL OWNERSHIP

Individualists hold that competition benefits
mankind by stimulating progress of every kind,
and by enabling the citizen to get what he
wants, where he wants it, and as cheaply as
possible. Socialism, he believes, is absolutely
incompatible with freedom. To all these argu-
ments the socialist replies that to make an
industry become a monopoly in the hands of a
state would be both a social and an economic
benefit. Economically the creation of a mono-
poly would save the immense waste of energy
in the present competitive system, with its
advertisements, its unnecessary middlemen and
its duplicate plants. Regarded socially, progress
would be more rapid with municipal owner-
ship if that progress were measured by true
standards ; because the capital would be ex-
pended for the true good of the whole com-
munity. The desire for the common good
would, under a socialistic system, make up for
the loss of the spur of private interests. Lastly,
to wind up the argument for socialism, the
survival of the fittest means the degradation
of the weakest ; and the modern competitive
struggle is not only wasteful but cruel.

Summing up the arguments concerning muni-
cipal ownership without reference to direct
employment, we find that the risk involved,

SUMMARY 121

the anticipated decrease in the productivity
of industry, the lessening of initiative and
inventive capacity, the increase in municipal
indebtedness and the tendency to create or
increase industrial monopolies, form the founda-
tions of the arguments against municipal owner-
ship and in favour of private industry; whilst
opposing them are to be found the whole
battery of arguments in favour of socialism. In
cases where the balance is held to go against
municipal ownership, the case against direct
employment by municipalities is thus much
strengthened ; for direct employment cannot
exist without municipal ownership.

It is true that the arguments for socialism
have been given in briefest outline. But it is
not proposed here to enlarge upon them, partly
because it is perhaps best that the case against
individualism should be stated by those who
are, not more impressed, but more convinced
by it, than myself. Some remarks will be
made, at the conclusion of this lecture, on the
connection between socialism and municipal
ownership ; but here it is sufficient to point out
that it is logical to hold that the moral are far
more important than the financial aspects of
economic questions, to admit the crying evils
of our individualistic system, and yet to deny

Q

122 MUNICIPAL OWNERSHIP

that any suggested socialistic system would be
both practicable and beneficial. The foregoing
summary, moreover, points to the conclusion
that individualists who adopt this position must
reject a large increase in municipal ownership
both on its own merits and as a stepping-stone
to some advanced socialistic system.

GENERAL CONCLUSIONS

In winding up this whole discussion on muni-
cipal ownership, it is natural to ask whether we
cannot discover some formula by means of
which it would be possible at once to decide
whether any given industry should be muni-
cipalised or not. Such a search would, in my
opinion, be made in vain, and all the conflict-
ing arguments must be weighed in the balance
as regards each separate industry. Accepting
this view, the conclusions arrived at in these
lectures may be epitomised in the following
sentences :

(a) The main question to be considered is
when is the direct employment of
labour by municipalities desirable ;
for municipal ownership without

GENERAL CONCLUSIONS 123

direct employment is not often
seriously demanded.

(b) The objections to municipal industry

are generally much greater if the
industry is operated by direct em-
ployment than if it is leased out for
management to private proprietors ;
and the objections to municipal
ownership, however the industry be
operated, are greater in the con-
structive than in the productive
stage of industry.

(c) The case for direct employment is

strongest in the productive stage of
an industry which tends to become a
monopoly, when the goods supplied
are of great importance to nearly
the whole of the community, and
when the cost of supply in the
future is not easily estimated.

(d) Where direct employment is rejected,

the case for municipal ownership
is strongest when a perpetual fran-
chise has been granted to private
proprietors, by means of which they
have acquired the control of a
monopoly.

(e) Each case of municipalisation must be

i24 MUNICIPAL OWNERSHIP

judged on its own merits ; and if
either the civic authorities are weak
and corruptible, or the number of
men employed in the industry is
great, or if it be one likely to afford
scope for much inventive capacity, or
there is any serious competition, then
the case against municipal ownership
is always strong.

(/) Where competition is free and effective,
municipal industry is never to be
recommended.

(g) The choice as regards industries tending
to become monopolies lies between
municipal industry and the better
control of private industry ; for the
demand for reform is genuine.

Merely to arrive at these general conclusions
as the result of our labours is, no doubt, very
unsatisfactory. But truth is often unsatis-
factory, and that is one of the reasons it is
not more often spoken. Neither students nor
politicians can do more than master the argu-
ments in this difficult controversy, arrive at
broad generalisations, and apply them fear-
lessly in making decisions with regard to
particular services.

MUNICIPAL SOCIALISM 125

SOCIALISTIC IDEALS AND MUNICIPAL
OWNERSHIP

Our main enquiry is, therefore, thus con-
cluded. Many questions have been perforce
omitted ; and, in the short time available,
an attempt will be made to fill up some of
the gaps thus left by considering briefly the
connection between municipal industry and
socialism.

Thus far it has been assumed that muni-
cipal ownership is an undoubted step towards
socialism ; and it has no doubt often been
asserted that this will prove to be the case
because the socialistic party will be assisted
in capturing the political machine by means
of the direct employment of labour. Whether
this is a correct forecast or not, will not be
considered : because these lectures do not deal
with politics. The question now to be discussed
is the extent to which we are realising the
economical ideals of socialists by the present
method of establishing municipal ownership.
The word socialism covers many meanings,
and few of us like to be called upon to define
it rigorously. It has been suggested by an

126 MUNICIPAL SOCIALISM

eminent German authority that the somewhat
vague aspirations of socialists are the result
of their belief in two not wholly consistent
rights : namely, the right of the labourer to
the whole product of labour, and his right
to work and wages. The demand for these
rights will, at all events, serve as a basis for
my remarks.

As to the first of these rights, those who
make a crude demand that the whole product
of labour shall be awarded to the labourer
will generally be found to have but hazy
notions concerning the play of economic forces.
It is, therefore, sufficient here to note that this
demand is closely connected with the demand
for the readjustment of the distribution of
wealth on the ground that the owners of
capital are in receipt of unearned incomes,
which should, at all events, be diminished
for the benefit of those who toil. That wealth
might be better distributed many of us are
prepared to assert; and it is, therefore, worth
enquiring whether municipal industry as at
present practised is, in truth, a step in the
desired direction.

Obviously the results obtained will depend
on the methods of municipalisation adopted.
Here it is not a question as to what would

MUNICIPAL SOCIALISM 127

occur if industries were appropriated with
inadequate compensation to the owners. We
are discussing municipal industry as it now
exists, and in order to narrow the issue, the
case of the purchase of electrical works by
an English municipality at their market value
will be considered as a typical instance. Now
the conclusion arrived at on a priori grounds
in a previous lecture was that the profits
made by such a municipal venture would not
necessarily represent the gain of an equal
amount ; and that, assuming the municipal
management to be very nearly as economical
as private management, the municipal revenues
would thus be increased sufficiently to cover the
interest on the municipal debts thus incurred,
but not to cover a sinking fund for the
redemption of those debts. This conclusion
indicates, I believe, results more favourable
than those which would in reality be obtained ;
because municipal management is, as a rule,
not nearly as economical as private manage-
ment. But, even assuming it to be correct,
the whole of the sinking fund, which is
obligatory in England, would have to be
provided out of taxation which, with private
industry properly regulated, would be un-
necessary but for this municipal venture.

128 MUNICIPAL SOCIALISM

But if a sinking fund for this purpose thus
necessitates the imposition of additional taxa-
tion, it is, in fact, equivalent to citizens being
forced to make an investment in return for
which no benefit will be received by any one
during the twenty to forty years during which
the sinking fund runs : that is, assuming that
the instalment system is in force. At the end
of this period, not only will no tax be levied
for the sinking fund, but the interest on the
loans raised for the purchase of the electrical
works will no longer have to be found out
of the profits of those works, and a consider-
able surplus from these electrical works will then
be available as part of the municipal revenues.
In other words, the community will begin to
draw the interest on its investment. Thus there
are two periods to be considered : there is the
period of investment, as it may be called, when
taxation is being levied for the purchase of
the works ; and there is the period of reward,
when the city reaps the benefits arising from
the sacrifices of its citizens.

Having made these various assumptions,
which necessitate, in my opinion, a too favour-
able view of municipal management being
taken, and which merely postulate well-
regulated private industry, the problems for

INCIDENCE OF TAXATION 129

consideration are as follows : — On whom does
the burden of the extra taxation fall during
the period of investment? To whom do the
benefits, due to the increase of revenue, accrue
during the period of rewards? And, lastly,
will the final result be a more equitable dis-
tribution of wealth amongst the different classes
of the community?

As the first of these problems, or that of the
incidence of local taxation, has been much
debated, it need not here be discussed. It
must, however, be noted that economists gener-
ally agree that normally both landlords and
tenants are hit to some extent by onerous local
taxation, whoever pays the tax-gatherer ; and,
this being so, the payment of a municipal sink-
ing fund out of taxation is equivalent to forcing
both parties to invest money in municipal works,
an investment for which no return is received
during the period of investment.

Difficult as is this question, it is even
harder to determine who it is who, in truth,
will benefit by the increase in the municipal
revenues which will be received after the
municipal industrial debts have been redeemed.
The distribution of the benefits during the
period of rewards will obviously depend on
the policy adopted by the civic authorities.

R

i3o MUNICIPAL SOCIALISM

Many alternatives will be open to them. They
may then expend this additional revenue by
raising the wages of their municipal employees ;
but to favour them thus is unjustifiable, and
this alternative may therefore be dismissed.
Again, they may increase the local expenditure :
a very probable proceeding. Or they may
lower the price of the electricity they sell, and
thus reduce the revenue to its previous level.
Or, lastly, this same result may be obtained
by a reduction of taxation. These three last
alternatives must be briefly considered, with
reference not only to direct results, but also to
those indirect considerations which so often
in economics give the lie to obvious con-
clusions.

As to the first alternative, if, during the
period of rewards, the local expenditure will
be increased in such a manner that the benefits
to the poorer classes will be proportionately
greater than the injury which had been in-
flicted on them by taxation during the period
of investment, it follows that the rich will
have been taxed in the first period for the
ultimate benefit of the poor. This is, no
doubt, a result in accordance with socialistic
aims. The services for which this additional
expenditure is to be incurred must, however,

REDUCTIONS IN PRICES 131

be carefully selected in order to make it certain
that the result will not be the opposite to that
desired.

Passing on to the second alternative, namely,
a reduction in the price of goods sold by
municipalities, the effect on the distribution
of wealth would depend on the nature of those
goods. In the case of goods of very general
consumption, such as gas in England, it is
probable that a reduction in price would also
be in effect the grant of a benefit to the poor
at the expense of the rich. There are, how-
ever, certain economic objections to goods
being sold below what may be called their
competitive price, some of the evil conse-
quences of the award of a bounty to a manu-
facturer thus being produced. Moreover,
municipal industry is not now confined to the
manufacture of "necessaries," and a lowering
of the price of State-made luxuries below a
certain level would be in effect to tax the poor
for the benefit of the rich. Socialists would
defeat their own aims by reducing the price
of electricity in England, for example, where
it is chiefly used by well-to-do people.

With reference to the last alternative to be
considered, namely, the reduction of taxation
during the period of rewards on account of

132 MUNICIPAL SOCIALISM

the profits arising from municipal industries,
this on general grounds is the rational policy
to adopt ; for, as it was the tax-payers as a
body who supplied the funds for the purchase
of the municipalised industries, the tax-payers
as a body should reap the rewards coming
from such investments. If this were the policy
adopted, taxation would fall on the different
classes of the community in the first period in
the same proportion as that in which the
relief from taxation, or the resulting benefits,
would be felt in the second period ; and the
obvious conclusion is that the effect on the dis-
tribution of wealth would be neither contrary
nor favourable to socialistic ideas.

Thus far only the more obvious results have
been held in view. Of the indirect conse-
quences, the first to be noted is that due to
the fact that an increase of taxation resulting
from the payment of a sinking fund on urban
debts would fall on the city only, and not
on the country round it. There are always
some persons on the actual margin of doubt
whether to abandon city life, and they would
be induced to migrate into the country by any
increase in urban local taxation. There would
be, therefore, a certain outflow of the popula-
tion in the period of investment, and one result

TRANSFER OF BENEFITS 133

of this outflow would be that rents would
fall. Taking the extreme theoretical limit, the
re it of a house might fall by an amount equal
to the increase in taxation thereon ; or, in
other words, the remaining tax-payers might be
able to shift the whole burden of the increase
of taxation on to the shoulders of their land-
lords. It is practically certain that this limit
would not be reached ; but it is equally certain
that urban landlords would find their rents
reduced to a certain extent in consequence of
any increase of local taxation due to municipal
industrial sinking funds.

It may be urged with some truth, however,
that time would not be given during the
period of investment for the increase of taxa-
tion to produce its full effects. But, in con-
sidering the effects in the subsequent period,
this objection cannot be urged ; because the
benefits due to the increase of revenue conse-
quent on the redemption of the municipal
industrial debts would last for an indefinite
period. During this period, the period of
rewards, it can be shown that an opposite
effect to that produced during the period of
investment would be experienced : namely,
that there would be an inflow of the popula-
tion, and that some of the resulting benefits

134 MUNICIPAL SOCIALISM

would be transferred to the landlords from
their tenants in the form of an increase of rent
due to this increased attractiveness of the
town.

The effect of such changes in the conditions
of urban life is, therefore, that, during the
period of investment, when taxation is being
raised for a sinking fund, ground landlords are
damaged by a decrease in rents, whilst in the
subsequent period they are benefited by a
rise in rents ; and, in the extreme limit, the
whole tax falls on the landlords and the whole
benefit accrues to them. If this limit were
reached, municipal industry would cause no
transfer whatever of wealth from class to
class ; and the more nearly it is approached,
the smaller becomes the field in which social-
istic effects can be produced.

Time permits me to mention only one other
of the many influences which tend to modify
the primary effects of municipal industry on
the distribution of wealth. By taxing the
richer classes, capital might be transferred
from its owners to the State ; whilst, in the
case of the poor, such taxation as was thrown
on them might merely diminish their available
incomes. Assuming the burden of taxation to
fall in this manner on rich and poor, and

TAXATION OF CAPITAL 135

assuming the revenue derived from the invest-
ment of the funds thus raised in municipal
industries to be used for the benefit of all
classes, the result would, no doubt, be that
the poorer classes would be benefited at the
expense of the rich.

Any such method of compelling the rich to
invest a large portion of their capital for the
benefit of the community at large instead of
for their own benefit would be, however, sur-
rounded by dangers if carried very far. In
the first place, a great increase in the taxa-
tion falling on the captains of industry would
lessen their energy, and thus check the com-
mercial progress of the nation, to the material
injury of all classes. Again, there would be
a temptation to expend some of the capital
thus drawn from the richer classes, not in the
establishment of municipal industries, but in
ordinary current municipal expenditure ; and, if
this were done, the national savings would thus
be reduced, and progress to that extent would
be checked. Moreover, many persons called
poor are, nevertheless, truly capitalists, because
they belong to trades unions, benefit clubs, or
insurance societies ; and taxation must be skil-
fully arranged not to draw a larger proportion
of capital from the poorer capitalists than from

136 MUNICIPAL SOCIALISM

the richer ones. Lastly, in spite of this taxa-
tion, the richer classes might become still more
relatively rich ; and their portion of the benefits
to be derived from municipal investments might
in this case tend to increase rather than to
diminish. For these reasons it is, therefore, not
unlikely that this plan for benefiting the poor
might increase either their actual or their
relative poverty. But if all these dangers could
be avoided, no doubt by taxing the capital of
the rich for the sake of establishing municipal
industries, socialists would be travelling along
the path sought by them.

To sum up this discussion on distribution, it
appears that, if the poor are to be especially
benefited by the establishment of municipal
industries, either capital must be drawn in
greater proportion from the rich than from the
poor, or the revenues thus obtained must be
devoted either to a reduction in the price of the
necessaries of life produced by municipal enter-
prise or to some expenditure especially designed
to benefit the poorer classes. But, if the
revenue is raised by merely taxing incomes,
and if the proceeds of any municipal investment
are devoted to a reduction in taxation, which
is the rational policy to adopt, municipal
industry will benefit or injure all classes alike.

REDISTRIBUTION OF WEALTH 137

Again, the poor may find themselves poorer
from what is called a forward municipal policy
if the prices of luxuries are thus reduced, or if
the progress of the country is thus checked,
or from other indirect effects. Lastly, the
scope for the production of socialistic effects
may be greatly reduced in consequence of
both burdens and benefits being transferred
to ground landlords. It appears, therefore,
that the establishment of municipal industries
according to existing English methods is a
clumsy, and an uncertain, and, if carried far, a
dangerous method of attempting to bring about
a redistribution of wealth.

Even if it be assumed, however, that it would
be wise to raise money by taxation and to
invest it for the benefit of any selected class of
the community, it still remains to be asked why
it should be invested in municipal industries.
This is, indeed, the more important question
in existing circumstances. A wise man in
making an investment looks mainly to the
return which it will yield and to its safety ; and
a wise city should act in like manner. As to
the interest on the investment, and remembering
the difference between gains and profits, we have
seen reason to believe that municipal industry
has, to say the least, nothing especially to

s

138 MUNICIPAL SOCIALISM

recommend it as an investment. Putting the
question of interest entirely aside, however,
and looking only to safety, the wise man who
is in debt will normally pay off that debt with
any available money which may fall into his
possession, rather than use it for some specu-
lative investment. Again, if in debt, and if
raising money by taxation which is not needed
for current expenditure, the wise city, acting in
like manner, should not invest that money for
the sake of making a profit, but should rather
use it to pay off its debts. But such a city
must, as a rule, I think, impose additional taxa-
tion for the sake of establishing a municipal
industry, though the fact that this is so is, as
a rule, entirely unperceived ; and this is, there-
fore, objectionable if the municipal industry is
established for the sake of making a profit.
It is objectionable, because if the city's debts
were paid off by this additional taxation, the
revenue would thus also be increased, and
increased in a safer manner. Thus, if the
socialistic plea for municipal industry is that
additional revenue can thus be obtained to be
used for the benefit of the poor, this plea breaks
down entirely in the case of all cities with
debts other than industrial debts : that is, in
the case of every large city known to me.

UNEARNED INCREMENTS 139

It may, perhaps, be urged in reply that by
the purchase of electrical works, a city will,
at all events, capture in future the unearned
increment of value due to its own growth ; and,
for this purpose, it may be wise to run into
debt. That an unearned increment of value
may thus be captured is true. But, as already
pointed out, this increment may in effect be
partly re-transferred to the ground landlords ;
and, moreover, steps cannot be taken for its
capture without some danger of the unearned
decrement being captured instead. The main
point, however, to be noted is that the unearned
increment can be captured almost equally well,
and without any risk, by granting suitable
franchises to private corporations.

The mention of this subject tempts me to
diverge in order to point out that municipal
industry may create a new form of unearned
increment of income. Take the case of a city
where gas, for example, is being sold by the
civic authorities at a price below the cost at
which it can be produced in neighbouring
localities : this result being due to the purchase
of the gas-works by the city out of the compul-
sory savings of its citizens. If any person was
to migrate to that city from any neighbouring
locality where he had not been thus compelled

i4o MUNICIPAL SOCIALISM

to save for the purpose of purchasing public
gas-works, would not the purchase of gas
below cost price in his new home be to him
an entirely unearned decrement of expenditure?
And would not this, or any other similar
advantage arising from the past savings of his
new neighbours, be equivalent to an unearned
increment of income? Yet it would be im-
possible to prevent immigrants from gaining
such unmerited advantages without restricting
the right to free movement on the part of the
people, a right which is essential to the progress
and prosperity of the working classes. May
not municipal industry, therefore, give rise in
the distant future to a temptation to impose
some such injurious restrictions? True, the
temptation may be lessened because the incre-
ment of income may mainly accrue to the
immigrant's landlord, and not to the man him-
self; but this is but a poor consolation to the
socialist.

But even if cities do not endeavour to retain
for their own citizens the benefits of their
savings in some objectionable manner, it does
seem probable that, just as individualism is
inevitably accompanied by competition between
individuals, so will municipal industry, as
distinct from national industry, inevitably tend

MUNICIPAL COMPETITION 141

to produce competition between different cities
in certain circumstances. Municipal socialists
are, no doubt, honestly striving to avoid the
admitted evils of the existing competitive
system ; but they seem blind to the fact that
the new form of competition which they may
be creating may also be attended by serious
evils. Competition between civic authorities
will, it is true, only be felt when competitive
industries are municipalised. But even now
some English cities are spending their money
in establishing places of amusement for tourists
and in advertising their attractions ; although
such advertisements are no less wasteful than
those in private industry, and although their
success, by drawing away visitors from other
localities, would be an indisputable injury to
their rivals. History teaches us that com-
mercial rivalry is one of the most deep-seated
causes of national enmity ; and it is there-
fore quite conceivable that such commercial
struggles between cities might in future become
very bitter and harmful. Here, then, is another
argument in favour either of strictly limiting
municipal industries to local monopolies, or
of national industry as opposed to municipal
industry.

But these vague speculations as to a possible

142 MUNICIPAL SOCIALISM

future must no longer detain us, and we must
return to the straight path of our argument—
namely, to the consideration of the question
whether municipal ownership is a step in the
direction of awarding the whole product of
labour to the labourer. If a transfer of wealth
from the rich to the poor is the end sought, we
have seen that it is but clumsily and ineffectively
attained by means of municipal ownership ; and
that, when a city is in debt, it would be wiser
to attempt to attain this end by imposing addi-
tional taxation in order to pay off that debt.
Municipal ownership is, in fact, not the best
step that can be taken in the desired direction ;
and rational socialists should rather devote their
attention to questions connected with taxation
if a redistribution of wealth be their main
object.

The second of the rights on which the
aspirations of socialists are said to be based —
namely, the right to work and wages — still,
however, remains to be considered. In its
crudest form, if made in connection with muni-
cipal ownership, the demand for this right is
a demand that every man who is out of
work shall be given employment at a muni-
cipal industry. This demand could not be
granted without the establishment of some

REGULARITY OF WORK 143

very advanced socialistic system ; and it must,
therefore, be dismissed as being outside the
scope of these lectures.

The general question of the unemployed may,
however, be held to be closely connected with
this right to work and wages ; and it is, there-
fore, not out of place to consider briefly whether
municipal ownership tends to make employment
more or less regular. Where municipal industry
is carried on like other industries, and where
employees are dismissed when their services
are not likely to be required for some little
time to come, then obviously the regularity of
employment is in no way directly affected by
the municipalisation of a number of industries.
To conduct industry thus is, however, certainly
not the ideal either of socialists or of indi-
vidualists ; and, although the latter may see
no way of avoiding the resulting evils, the
advocates of municipal industry certainly do
hope to make employment more regular by
the municipalisation of industry. When the
London County Council last winter began to
lose heavily by its steamboat service, one
councillor declared that it was a point of
honour to keep their employees in regular
work, profit or no profit ; but in this case
honour was vanquished by the London fogs,

144 MUNICIPAL SOCIALISM

and the steamboat service was suspended when
the loss became very great. Civic authorities
will no doubt, however, as a rule, incur
greater losses than private proprietors in order
to retain their hands at work ; for it requires
some courage on the part of the vote-loving
councillor, even when he believes that muni-
cipal employees should be treated no better
than private employees, to act on that belief.
To retain extra hands must add to the cost of
manufacture, and such action on the part of
civic authorities must result in prices being
raised, when consumers are in effect taxed, or
in a diminution of profits, when an additional
burden is thrown on tax-payers. Such addi-
tional burdens may exist unfelt at all times ;
but the probability of unnecessary hands being
retained in municipal industries is greatest
when trade is slack. Taxation always dis-
courages industry ; and the additional burden
thus thrown on consumers or tax-payers in
long periods of depression must tend to
increase the evil. Thus the municipalisation
of many industries, and not of all industry,
would benefit the employees thus municipal-
ised ; but it would add somewhat to the
sufferings of that margin of indifferent work-
men in private industry, who always find it

CONCLUSION 145

hard to obtain employment. The lot of the
working classes would become more unequal,
not more equal ; and a step contrary to the
ideals of socialists would in this respect have
been taken.

Thus, whether the right to the whole product
of labour or the right to work and wages be
the guiding principle of socialists, we see that
little or no progress is made in the desired
direction by the mere municipalisation by
present methods of a number of industries.
Socialists, no doubt, however, wish to muni-
cipalise one industry after another until all
capital is thus nationalised ; and it is by the
results hoped to be obtained in this final stage
of social evolution that they would be judged.
Municipal ownership and socialism are no
doubt different ; but surely it is most im-
probable that, in cases where harmful results
immediately spring from municipal ownership,
it can be the right step to take whatever be
the ultimate goal we should, in truth, seek to
reach. Would not a very widely extended
experiment in municipal ownership afford a
valuable indication of the conditions which
would exist under a completely socialistic
system? With this end in view I should
rejoice to see such an experiment tried in

T

146 MUNICIPAL SOCIALISM

any country but my own. If the result was
that taxation direct and indirect was no
heavier than at present, that corruption was
not increased, and that progress was not
checked, then I should have to own that I
was mistaken, and that socialists might fairly
point to such results as telling strongly in
favour of their views.

But does not the amount of national and
municipal industry now in existence constitute
a sufficient basis to enable impartial enquirers
armed with full powers to arrive at reliable
conclusions? Rational socialists, who only
wish to see their proposed system introduced
if, in truth, it would be beneficial, should join
with individualists in insisting on a thorough
and searching investigation into the facts now
before us : an investigation which has thus
far been somewhat shunned by the advocates
of municipal ownership in England. Cannot
we all agree that our wisest course is now
to study what we see rather than to advance
further along a path which may prove to be
leading us astray? If socialists are right,
this might not even cause delay ; because
their case would thus be strengthened. If
individualists are right, the gain might be
enormous ; because attention would thus be

CONCLUSION 147

directed to more rational methods of social
reform.

There is, however, no chance whatever that
such a policy of waiting and investigating
will be adopted ; and we in Europe are
destined for a time to march in the direction
of socialism. By all means, therefore, let
socialism be studied. As already remarked,
this word covers many meanings. At one
end of the scale it merely denotes the desire
to benefit our fellow-creatures — an object for
which all can unite. At the other extreme it
means a definite and formulated method of
placing the production and distribution of all
goods under the management of the State.
These may be, indeed, very different medicines,
and we must be on our guard against those who
would induce us to swallow a stronger dose at
the same time as a weaker one, by including
both within the same coating of sugar. The
mere mechanical difficulties connected with the
distribution by the State of all work and of all
rewards for work done are appalling, though
conceivably not insurmountable. But the diffi-
culties which lie deep in the roots of human
nature are even greater. If some fairy, by a
stroke of her magic wand, could make all our
local administrators as diligent in their public

148 MUNICIPAL SOCIALISM

duties as in their private affairs, as ready to
consider the claims of minorities as those of
majorities, as anxious to look to the future as
to the immediate effects, and also wholly in-
corruptible, then this would be not a step, but
a leap in the direction of true social reform,
and a leap at which we should all rejoice.
In such idyllic conditions, no doubt many
additional duties could be thrown on elected
bodies. But even then I could not call my-
self a socialist according to the most extreme
meaning attached to that word, unless convinced
that under any proposed socialistic system I
should retain my sense of freedom, and that
others would retain those powers of initiative
on which the progress of the world depends.

Those of us who feel compelled to abandon
the dream of formulated socialism should not
be discouraged as reformers. We should look
for guiding lights elsewhere. It may some-
times be right to do present harm that future
good may come ; but the future good must
be most clearly demonstrated before this is
right. The world we see around us has been
developed by little steps, each step being taken
solely because of its fitness to the immediate
conditions ; and we must be cautious in
endeavouring to improve upon the system of

CONCLUSION 149

evolution in force throughout the visible
universe. All primary results, whether im-
mediate or future, should be held in view ;
whilst little reliance should be placed on mere
speculations as to the results of untried systems.
Acting in this spirit, we should endeavour to
take many little steps, each with the object
of gradually elevating the condition of all
classes, but especially of the poorer classes.
These steps may be either in the direction of
reforming the laws affecting taxation or adminis-
tration, or may be made with the higher aim
of raising the ethical standard of those who
frame or administer these laws. But, which-
ever way we may look, we can easily fill our
days with good works, all in the direction
of true social reform, even if during our
whole lives not a single additional industry
be municipalised.

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